A subchapter S Corporation is a corporation that once incorporated, elects a special tax status. The Subchapter S tax election enables the shareholder to pass through earnings and profits directly to their personal tax return. If the corporation has a profit, the shareholder must pay themselves wages that meet the standards of "reasonable compensation."
What are the main advantages of forming an S Corporation?
- An S Corporation is said to have less risk from government audits as a corporation (as opposed to sole proprietor or LLC).
- Members of an S Corporation have limited personal liability for business debts.
- Members of an S Corporation may use corporate losses to offset income from other states.
- Members of an S Corporation may save on employment taxes by taking distributions instead of salary.
- With an S Corporation, there is no double taxation threat because the corporation is not a separate taxable entity.
Timely and accurate filing S Corp Election is critical to being treated and taxed as an S Corporation. In general, domestic corporations with no more than 100 qualified shareholders may elect S Corporation status which permits the income of the corporation to be taxed to the shareholders rather than to the corporation itself. This form generally needs to be filed within the first 75 days of incorporation.
If the corporation wants to be treated as an S Corp for the current taxable year, then it must make its S Election within the first two and one-half months of the corporation’s taxable year, or, at any time during the preceding taxable year.
If the S Election is made after the first two and one-half months of a corporation’s taxable year, then that corporation will not be treated as an S corporation until the next taxable year.
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