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Understanding an S corporation

On Behalf of | Dec 15, 2015 | Business Formation & Planning

When setting up a new business in Florida, many people find that an S corporation operating model offers unique benefits, especially for small businesses. Entrepreneur explains that with an S corporation, owners can avoid personal liability as with a C corporation structure. However, they can also enjoy significant tax benefits.

According to the Internal Revenue Service, the income and losses of an S corporation are passed on directly to the individual shareholders. This means taxes are assessed on shareholders, not on the company, and are determined based upon each shareholder’s personal tax bracket and status. This is often referred to as a flow-through method because funds flow through from the company to the shareholders. There are still some taxes levied on an S corporation but they are far less than what are levied on a C corporation.

S corporations are allowed to operate on a cash method which simplifies accounting compared to an accrual method. Other administrative requirements are similar to those for C corporations. These include keeping minutes, holding meetings, filing articles of incorporation and requiring shareholder votes for all major decisions. S corporations wishing to seek additional funding can be limited as they are only allowed to issue common stock.

International businesses are not allowed to utilize the S corporation structure and non-resident aliens are not allowed to be among their shareholders. Valid S corporation shareholders include some estates and trusts but predominantly individuals only. Other corporations and partnerships, for example, are not eligible to be shareholders of an S corporation.