What You Need To Know About S Corporations

If you are planning to incorporate your business

, you need to decide on what business structure you want your business to have. There are many types of legal business structures to choose from. One of them is the S Corporation, or, S Corp. An S Corp is a structure wherein the company has decided to use Sub Chapter S of the IRS Code. Instead of paying income taxes, an S Corp divides its entire profit and losses among its stockholders. Then, these stockholders report their dividend on their individual income taxes. Learn more about S Corps by reading through the rest of this article.

The shareholders of an S Corporation company carry the burden of taxes since the company itself does not need to pay taxes on its profits. It is the owner and/or co-owners of company that carry the heaviest burden of taxes. The taxes that shareholders need to pay are in direct proportion to the share that they have invested. In other words, if a shareholder owns 60% of the stocks, then he or she is required to pay 60% of the profit or loss tax on the company for that entire year.

The employees of an S Corporation are still required to pay FICA taxes on their payrolls unlike independent contractors. It is dictated by law that employees need to pay all State, County and Federal taxes.

There are certain key factors that you need to remember if you decide to turn your company into an S Corporation. Read more and learn about these key factors.

In order to be qualified to become an S Corporation, you must, first and foremost, be a domestic corporation or a registered LLC. Moreover, there should only be one stock class with a maximum of 100 stockholders. All of your stockholders must be natural citizens and United States residents. Also, your company must not have any shares of corporations or other companies. A few minor exceptions are allowed, though, like a 501(c) (3) corporation. All profits and losses must be applied proportionate to the stock that each stockholder has invested.

There are also liabilities that come along with being an S Corp. Legally, S Corps are classified as companies whose stockholders have very limited liabilities, but this does not mean they are completely liability free. Stockholders of S Corporations are still responsible for the company in some situations based on their percentage of shares owned which potentially can exceed losses.

by: Cameron Telford

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