S-corporations are pass-through entities. Different from a standard c-corporation, s-corporations are not subject to federal income tax. This means that all of the profits from the corporation are passed through to the shareholders. S corporations may be publicly held, but also must adhere to specific rules and regulations to qualify as an S corporation.
S-corporations differ from C-corporations in that they receive more tax benefits because they are considered a flow-through tax entity. Similar to a partnership, sole proprietorship, or LLC, the profits and losses of an S-corporation flow through to the shareholder’s personal tax returns.
When you consider the growth potential and organizational structure of an s corporation, it is similar to that of a c corp but on a lighter level.
Every business that files as a corporation is first classified as a c corp. Once this is complete, you can then fie as an s corp, as long as you meet all of the requirements.
These requirements include:
Corporations that choose to elect taxation as an S-corp do so to become a pass-through entity. This means your company will not be required to file and pay taxes. Instead, as an owner, you will need to show the earnings on your personal tax return.
Essentially, the profits of an s corp are only taxed when paid out as salaries or dividends to shareholders. This can save a huge amount of money for a large corporation but may mean nothing for a small business.
It is essential you take care when doing your taxes as an s corporation because otherwise you can make a single mistake that will force you to be taxed as a C corp, and suffer dual taxation.
One of the main advantages of a standard corporation includes the ability to provide preferred shares. Despite this, choosing to be an S corp provides many different advantages. By default, a corporation must pay its own taxes. This leads to double taxation. By choosing to become an S corp you can avoid this and only pay taxes as an owner on your personal income tax return.
If you are a small corporation, then an S corp may not be right for you. This means that running payroll, and paying payroll taxes may be more expensive for you as compared to what you would save.
There are many different forms of taxation. Since an LLC is most flexible, it can choose any tax election. The reason an LLC may elect to be taxed as an S-corp is to maximize the best tax savings.