Demystifying S-Corps: What Are They?
If you’ve ever spent any time reading financial magazines, you’ll have come across the term S-Corp. These organizations seem to be everywhere. But what are they, exactly? And what do you need to know about them?
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Those are the topics we explore in this blog. We’ll cover everything from the definition to the process of formation. If there’s anything you ever wanted to know about this type of business, this five-minute read can help.
Definition Of An S-Corp
An S-Corporation is a business structure that combines the legal benefits of a regular business corporation with the tax advantages of a partnership or sole proprietorship. Business owners avoid double taxation on corporate income, and various losses and deductions.
Who Qualifies?
The IRS can be a little strict when it comes to handing out S-Corporation status. It won’t do it automatically.
For instance, S-Corps can’t have more than 100 shareholders (unless some of them are family members). And everyone who sets up the company must be a U.S. citizen or official resident.
These firms can only issue one class of stock. Again, that means that they can’t have preferred shares or anything like that.
Finally, you can’t set up an S-Corp if you want to find a financial organization. The rules don’t allow it.
If you need assistance for applying for a federal EIN, there are various services available. These can tell you what you need to do to strengthen your case and ensure you get the result you want.
How Do S-Corps Differ From C-Corps?
To make matters more confusing for the average entrepreneur, the IRS defines two types of corporations, S-Corps and C-Corps. On paper, they look similar. But in practice, they can be remarkably different.
The main difference is in their tax treatments. S-Corporations pass-through taxation to owners, while C-Corps are subject to paying corporate taxes and individual shareholder taxes (a double taxation situation).
C-Corps can also have different classes of stock. For example, companies might issue preferential stock that enables some shareholders to have a say on the running and management of the business, but not others.
Converting From An S-Corp To C-Corp
Business owners can sometimes convert from a C-Corp to S-Corp and other company structures. However, you’ll need to follow specific tax and structural guidelines.
The decision to switch between various types of corporate structures is a large one and can have a significant impact on your business operations, so don’t take the decision lightly. If you decide to switch to a new format, always speak to professionals about any proposed changes.
Choosing The Right Structure
If you’re struggling to choose the right structure for your business, this section can help. The success of your enterprise may depend on the decision you make because of the various tax implications.
S-Corporations are usually the better choice for people wanting to balance tax liability with efficiency. However, it may not be the most suitable option if you believe your enterprise will grow fast or you have a large number of shareholders. Always consult your partners before making a decision on company structure.