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What is an S-corporation?

On Behalf of | Nov 2, 2021 | Business Formation & Planning

Choosing the correct entity type when you start your business can significantly affect its chances of success. There are pros and cons to each type, related to tax, simplicity and cost.

An S-corporation is not the simplest form to use or the cheapest to set up, but it can have significant long-term tax advantages. It is not an option open to everyone, and if you wish to become an S-corporation, be aware of the following:

  • You must incorporate and operate your company in the United States
  • You cannot have more than 100 shareholders
  • You can only have one sort of stock
  • Your shareholders must meet IRS requirements

Why might you want to register as an S-corporation?

The principal reason for setting your business up as an S-corporation is to pay less tax. Rather than the company paying tax at the corporation tax rate, then shareholders paying again, you pass the responsibility through to the shareholders. They pay tax on the dividends they receive as part of their personal tax filing. So compared to a C-corporation, you can avoid double taxation and prevent the need to file four times a year.

What protection do S-corporation owners get? 

You get limited liability protection when you set up as an S-corporation. Putting a clear legal boundary between you and your business avoids problems with the company affecting other projects you have or putting your family home at risk.

If you think registering your company as an S-corporation could be beneficial, it is essential to find out more. Your business is unique, and the entity type you choose is just one of the many elements to consider as part of your overall business strategy.