Information About S Corporations for New Business Owners
Some Advantages of Filing as an S Corporation
- S corporations do not pay taxes at the entity level, so startup expenses and losses can flow directly to shareholders and be used to offset other income that is reported on the individual shareholder's tax return and reduce taxes owed
- Shareholder distributions are currently not subject to self employment tax
S Corporation is formed the same way a regular C Corporation is formed. A corporation is a legal entity created under the laws of a particular state. However an S corporation is one in which an election has been made for tax purposes to be treated under Subchapter S of the Internal Revenue Code. The filing of an S election permits the corporation to avoid a double taxation of its income, bypassing the corporate tax level. Generally, Form 2553 must be filed with the IRS within 75 days of incorporating. State laws vary on the tax treatment of S corporations for state income tax purposes. Many states also require a separate form be filed with them to allow S status. Other states and cities, such as New York City, do not acknowledge S status.
A corporation is a legal entity created under the laws of a particular state. It is distinct from its owners, who are called shareholders and has its own legal existence.
In general, S corporations are treated as "pass-through" entities for income tax purposes. This means that the income or loss from the entity pass through to the owners and their allocable share is reported by S corporation shareholders on their individual tax returns. This "pass-through" process is the same for partnerships and LLCs. The S corporation files a return with the IRS, Form 1120S and generates a Form K-1 to each shareholder, which details the items of "pass-through" to the individuals Form 1040.
Not every corporation can qualify to be taxed as a subchapter S corporation. The IRS imposes a list of limitations and restrictions that the business and shareholders must meet and continue to comply with at all times.
Rosedale & Drapala, CPAs can help you determine if S Corporation status is the appropriate choice for your new business.
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