S corporations

S Corporations

An S corporation provides support and assistance to family businesses, distributes the income to shareholders directly, and prevents double taxations, which most corporations are subjected to.

Is your business growing? Do you think you need a better business structure because the tax rate is growing too, and overwhelmingly so? If that is the case, becoming an S corporation might be what you are looking for. An S corporation, also known as S corp. is a business structure that provides pronounced tax benefits while protecting ownership flexibility. For ordinary business persons, the process of acquiring this status can seem to be a daunting task. The assistance offered by lawyers at Trademark Counsels can help you justify your stand and prepare the documents needed for the legal procedure.

Pros:

·         Tax advantages:
Like LLCs, S corporations are subjected to pass-through taxation, which means that the taxes are passed through to the personal income of an owner instead of being taxed under a corporation. Another advantage S-corporations enjoy is that you do not have to pay double taxation. Instead, you are only taxed once at the shareholder level. Such corporations are also free from paying federal income tax, save for a few capital gains and passive income.

·         Protection:
If your corporation acquires the status of “S corp.”, you will have legal protection for your personal assets. This means that the business assets and personal assets will be separate from each other, such that the shareholders are not personally held responsible for the company’s debts or liabilities.

·         Flexibility:
As the owner of an S corporation, you are free to characterize your income due for taxes. You can identify yourself as an employee of the business and pay yourself a salary, aside from that you may also reward yourself with dividends. These dividends are usually taxed at a lower rate or are tax-free. This helps you lower tax liability, given that you characterize the salary and dividends justly. You do not want the IRS to see you rewarding yourself with a false low salary just to avoid taxes.

·         Easy ownership transfer:
Transferring the ownership interests is not a complicated procedure, and it does not end with significant tax consequences or termination of the corporate. An S corporation ownership transfer does not require inconvenient accounting rules or necessitate accommodations to property basis.

 

Cons:

·         Ownership Restrictions:
S corporations are allowed to have only one class of stock, which is why it is difficult to attract investors. The number of shareholders is fixed, it cannot exceed 100 shareholders.
Another downside of having an S corporation is that it can’t be owned by foreign owners or by some corporate entities or trusts.

·         Re-characterization of Wages:
The income can be given out as dividends or wages, but the IRS inspects the payments cautiously to double-check the payments you are actually making. Consequently, the income might be re-characterized and you might end up paying higher taxes, or it might result in a deduction to compensate for what has already been paid.

·         Tax Qualification Mistakes:
In rare cases, owners make mistakes related to various elections, notifications, filing requirements, consent, and stock ownership which may lead to the termination of their S corporation status. But this can be rectified easily.

At Trademark Counsels, we will connect you with attorneys who have years of experience in the field. You are sure to benefit from their knowledge and expertise. They can help you weigh your options and choose the best course of action for your company.

 

Requirements for Becoming an S Corporation

To achieve the S corporation status, a business must satisfy these requirements:

·         Shareholders must be US citizens or residents.

·         The business can only have one class of stock.

·         Only individual shareholders are allowed, which include certain trusts and estates. No partnerships, corporations, or non-resident shareholders are eligible.

·         The business must not fall in the ineligible corporation groups such as insurance companies, possession corporations, financial institutions, domestic international sales corporations.

·         All shareholders must agree on the election.

·         The profits and losses of the business must be distributed in accordance with each owner’s interests in the business.

If you still have any queries regarding the benefits and drawbacks of owning an S corporation or are considering the option of making your company an S corp., do give us a call. We are sure that many of the lawyers at Trademark Counsels will be happy to help you and your business become successful.