If you are ready to incorporate your business, one of the business formations you are likely considering is the S corporation (sometimes shortened to S corp). What is an S corporation? What are the advantages and disadvantages of using this particular type of business setup? Let’s take a closer look at how S corps work.
What Is an S Corporation?
An S corporation is a type of corporation that is used to eliminate double taxation, which may otherwise occur when the corporation itself and any shareholders both get taxed on profits. Unlike a C corporation (the usual corporation format), an S corporation allows for the business profit or loss to be reported on the owners’ personal income tax return. That means the business does not have to pay additional taxes on the profit. This is accomplished by shareholders being paid reasonable wages from the company. These tax benefits are the primary advantage of S corporations.
Does My Business Qualify as an S Corp?
There are several restrictions on what businesses qualify to be an S corp. These include:
- Must be a domestic corporation
- Shareholders must be individuals rather than partnerships or other corporations
- The max number of shareholders is 100
- Certain types of businesses do not qualify (i.e. insurance companies)
The restrictions on what qualifies as an S corp are the primary disadvantages because many companies must choose C corp instead.
Differences for S Corporations in California
Some of these tax advantages do not apply to California state tax. For example, in California, income is taxed at both the corporate and shareholder level. Therefore, one of the biggest advantages of using an S corp is affected in the state of California. However, benefits are still received when filing federal income taxes.
Applying to Become an S Corporation
If you are interested in turning your small business into an S corporation, contact Pokala Law. We can help you to determine if this is the best type of business formation for your company and assist you in filling out all of the paperwork accurately. Call 1-844-695-1487 to get started.