What You Should Know About S Corps, Part 1

December 10, 2019 by OSYB Staff

IntuitQuickbooks shares that before opening a new business, a decision to make would be the type of entity you want to operate:

• sole proprietorship
• partnership
• limited liability companies
• C corporations
• S corporation

So what is an S corporation?  “According to the Internal Revenue Service (IRS), S corporations are corporations that elect to pass corporate income, losses, deductions, and credits to their shareholders for federal tax purposes. So an S corp is not necessarily a type of business structure as much as it is an elected tax status.”

“An S corporation is essentially a regular corporation that has applied for “S corporation” tax status. S corp shareholders report pass-through income on their personal income tax returns. By reporting income here, S corporation shareholders avoid double taxation.”

Advantages of an S corporation:

• tax benefits
• protects against personal liability unless the shareholder offered a personal guarantee
• shares to investors while minimizing their potential risk

Though an S corp status has benefits four criterion need to be met and maintained throughout the existence of the business. The criteria are:

• Must be a domestic corporation, operating in the United States
• May not have more than 100 shareholders
• Must have only one class of stock
• Must only have allowable shareholders. Other corporations, partnerships, and non-resident aliens may not be shareholders of the company.

Keep in mind that only certain companies are eligible to elect S corp status. Here are some examples of companies ineligible for S corp status:

• Banks
• Credit unions
• Any insurance company
• Any business that receives more than 95% of its gross income from exports
• Corporations that use a specific type of foreign tax credit known as a possessions tax credit

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For full article: What is an S corp? Everything small business owners need to know

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