S-CORP Products: Approximately 5% of clients choose to form an S Corp. A corporation or LLC can elect to be taxed as an S corporation. An S corporation is an ordinary business formed and operated under a state’s general corporation laws. Forming an S corporation may be ideal for businesses that are engaged in a service or trade.
Corporation Advantages and Disadvantages:
Advantages - S corporations, unlike C corporations, do not pay federal income taxes. Like partnerships and LLCs, S corporations are generally treated as a flow-through entity where income, deductions, and tax credits flow through to the shareholders on an individual level, not the corporate level. S corporations may also save money on self-employment taxes.
Disadvantages – The primary disadvantages of S corporations are higher administrative costs and rigid operating structure, especially with respect to shareholder distributions. S corporations have lost favor with the advent of the modern LLC.
General Requirements of Formation
A Federal Tax ID number (EIN) is required.
To qualify for an S corporation, the company must:
Be a “domestic” corporation or organized in the United States or under federal or state law;
Have only allowable shareholders:
May generally be individuals, certain trusts, and estates;
May not generally be partnerships, corporations, or non-resident alien shareholders;
Have no more than 100 shareholders;
Have only have one class of stock; and
Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
All shareholders must consent to S corporation status.
Finally, the company must file Form 2553, “Election by a Small Business Corporation,” to indicate it elects S corporation status.
-Select State Below To View Specific S-Corporation Formation Requirements-
Q. What is the difference between an LLC, an S-Corp, and a C-Corp?