When determining the type of organizational structure you will adopt for your latest business venture, you will have several options to choose from. Each organizational structure entails its own levels of liability and responsibility for the owners or shareholders, as well as IRS tax requirements. Whether you are engaged in an S-Corporation, a C-Corporation, or some type of partnership, Geddes & Company, P.C. has the capabilities to help your organization with its accounting and tax preparation needs.
The business and accounting professionals at Geddes & Company, P.C. have years of experience handling the tax preparation and restructuring needs of S-Corporation owners. We pride ourselves on staying current on the latest changes to tax policy and the business marketplace. Whatever your needs as an S-Corporation owner or operator, Geddes & Company, P.C. is eager to assist.
Understanding the S-Corporation
If you are looking to form a new business as an S-Corporation, or are considering incorporating your current business, it is important to understand the in’s and out’s of the S-Corporation business structure. Below are some details concerning what an S-Corporation is, and the various advantages and disadvantages this business typology can provide.
What are S-Corporations?
Businesses incorporated as S-Corporations combine different aspects of both the general partnership organizational structure, as well as the traditional corporate structures.. For tax purposes, an S-Corporation is treated similar to a general partnership, in that it is seen as a pass-through entity by the federal Internal Revenue Service. This means that any income generated by the corporation is only taxed once at the individual level, unlike a regular corporation where business income is taxed both at the corporate level, then again at the individual level.
An S-Corporation issues stock to shareholders, who are protected from liability and the seizure of personal assets in the case of business liabilities. In an S-Corporation structure, the business owners are viewed as shareholders, and are therefore protected from corporate liability, however, as a pass through entity, S-Corp shareholders may still be responsible for organizational losses.
Benefits of an S-Corporation
There are several benefits associated with the formation of an S-Corporation.
As a business owner/shareholder with an S-Corporation, your personal assets are protected from government seizure, unlike in a sole proprietorship or general partnership. This ensures that, should your business get into financial trouble, your personal finances will remain untouched, thus eliminating a great deal of risk associated with owning a business.
Pass-through Entity Status
Additionally, as a pass-through entity, an S-Corporation reduces the potential tax burden on its owners. Income, as well as losses, generated by an S-Corporation, after being passed onto shareholders, are taxed as personal income, avoiding the corporate taxes other business typologies incur. Even if your business suffers financial losses in a given year, these losses can potentially offset earned income.
The S-Corporation business structure allows shareholders in the company to also be employees. This allows employees to receive a salary from your company, as well as tax-free dividends and other distributions. By declaring received dividends or other distributions as salary, you as a business owner reduce self-employment liability while simultaneously creating tax deductions for your business in the form of exempt business expenses.
Although business entities registered as S-Corporations do enjoy certain benefits not found in other business structures, there are some disadvantages to incorporating your business as an S-Corp. Below are several of the potential hangups S-Corporations may face.
Startup and Scrutiny
When compared to a sole-proprietorship or partnership, S-Corporations face higher levels of scrutiny, documentation requirements, and ongoing expenses. The process to incorporate a business as an S-Corporation requires a submission of articles of incorporation documents that are somewhat more complicated and time consuming than what is required for other business structures. S-Corporations may also be required to pay ongoing reporting fees or franchise fees on an annual basis to stay in business.
Also, because an S-Corporation allows dividends to be paid to employees, the IRS looks at these transactions with a higher level of scrutiny. For tax purposes, wages can be characterized as dividends by employee/shareholders, and vice versa. This characterization adds another level of complexity to tax filings. It is best to consult with a tax and accounting professional to determine how to go about treating the dividends and wages of your S-Corporation.
S-Corporations are only allowed to issue one type of stock. Additionally, there can only be 100 shareholders in an S-Corporation at any given time. This limits the type of investors your S-Corp can have, and how dividends and distributions can be dispersed. Furthermore, income and losses in an S-Corporation are distributed based on shareholding, and not on a formal operating agreement such as with an LLC.
Let Us Help
Forming a new S-Corporation or restructuring your company into an S-Corporation structure can be cumbersome and confusing without the advice and knowledge an expert can provide. Before taking the first steps to S-Corporation formation, be sure to consult a professional familiar with the tax burden, documentation, and organizational requirements an S-Corporation entails. Contact Geddes & Company, P.C. today to learn more about the S-Corporation option for your business.