Introduction To S Corporations – What You Need To Know About It
There are several essential facts regarding S Corporations that you should be aware of and one of which is the fact that this term refers to corporations that have been elected to be taxed as a flow-through entity, something that is similar to LLC or Limited Partnership. For the information of many, the S in the S corporation refers to an IRS code section. That code section or taxation is called as the S election and it allows the shareholders to be taxed only at the individual level rather than at both the corporate and personal level, hence, avoiding any potential double taxation such as the C Corporation. Not only that, there goes the fact as well that S corporation does not have federal income levied to it unlike the C Corporation wherein they are taxed at both the corporate level and individual level, earning them the description of double taxation. As a matter of fact, there are many businesses out there that favored S Corporation over C Corporation for the very reason that the former only has single taxation and limited liability protection, something that is beneficial for those who have charging order protection extended to corporate shares.
The next thing that we want you to know about S Corporation is that it has specific restrictions when it comes to ownership. There must only be one hundred to fewer owners, and all of them must be individuals or their living trusts. Multi-member LLCs, non-US residents as well as Corporations are some of the entities that cannot be S Corporation owners. In the event that the restrictions we mentioned above are not met, the IRS will decide to refer the corporation to C Corporation and double tax them accordingly.
There are so many good things that come from choosing S Corporation like the following: unlimited number of management, no state residency requirements, limited liability for management and shareholders and great income-splitting for potential owner/employees. Furthermore, know that when you become an S Corporation owner, you will get a court-recognized, distinct existence that will help protect you from personal liability which may cause you to lose your wealth in the form of assets such as your nest egg, your home or even your car. That’s not the only thing you have to know regarding the benefits of S Corporation as there are more like allowing you to enjoy flow-through taxation in which your profits are distributed evenly to shareholders who are taxed as well on earnings at their level. Good privacy protection is among the good things that come from becoming an S Corporation owner. Apart from the benefits we cited here, there are still more that you have to know of like allowing you to take regular payroll deductions, smaller salary and pay income taxes while the rest of the profit can be assigned as distribution subject to income tax alone.