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S Corporation

S corporations share some of the benefits of limited liability enjoyed by a C corporation, meaning that the owners (called shareholders) are not personally responsible for business debt and liabilities. S corporations have the added benefit of pass-through taxation; meaning, business income/loss is reported on the owners’ personal tax returns and paid at the individual level.

Advantages:

  • Tax deductions: Expenses such as travel, dining and more may be tax-deductible.
  • Tax savings: Owners of an S corporation can enjoy self-employment tax savings, since owners are classified as employees. Also, income/loss is reported on the owner’s individual tax return rather than at the business level.
  • Limited liability protection: Owners are typically not held responsible for business debts and liabilities.
  • Easy ownership transfer: Ownership is easily transferred through the sale of stock.
  • Raise capital: Selling shares of stock can give an infusion of needed capital.
  • Credibility: Corporations are often perceived as a more legitimate entity than a sole proprietorship or general partnership.

Restrictions:

  • Have no more than 100 employees.
  • Owners must be US citizens or permanent residents.
  • Unlike a C corporation, an S corporation is not eligible for a “dividends received” deduction.

How do I form an S corporation?

Articles of Incorporation (aka Certificate of Incorporation) must be filed with your state, and the necessary fees paid. After incorporation, you will need to file Form 2553 with the IRS to elect S corporation status. S corporations also are required to adopt bylaws, hold a meeting of directors and shareholders, and issue stock to owners.