Five Signs Your Business Would Be Better Off As An S Corporation

This post was published on the now-closed HuffPost Contributor platform. Contributors control their own work and posted freely to our site. If you need to flag this entry as abusive, send us an email.

Choosing the legal structure for your business is no small decision. It affects how you need to legally conduct your business and impacts your tax liability.

As you explore your options, you may discover certain wants and needs of your business will make one or another structure more attractive. For example, if the following five characteristics apply to you, you might consider forming your company as an S Corporation.

You want to protect your personal assets. An S Corporation provides separation between your business and personal assets. So if someone were to file a lawsuit against your business, your home, personal savings accounts, and other personal property would have protection.

You want to grow. Unlike sole proprietorships and Limited Liability Companies, S Corporations give you the opportunity to sell company stock. This can help fund initiatives to grow your business. As an S Corp, you may sell one class of stock to 100 or fewer shareholders (who cannot be entities, such as partnerships and corporations).

You want to keep tax obligations under control. As an S Corporation, an owner/shareholder reports corporate income on his/her personal income tax returns. With corporate profit and losses flowing through to its shareholders and the fact that self-employment taxes are levied only on owner/shareholders’ salaries rather than on income taken as distributions, S corporations offer some tax advantages. Not only do they minimize self-employment tax liability, business losses can offset other income on shareholders’ returns. With an S Corp, the business itself is not taxed on income and therefore avoids the double taxation (tax on profits at the corporate level and then again at the personal level on shareholders’ tax returns) that C Corporations face.

You want the business to have staying power. An S Corp stands as a distinct entity, clearly separate from its shareholders. If any shareholders decide to sell their shares or leave the company, your business can continue to exist and operate without them.

You want street cred. With “Inc.” after your business name, customers and potential investors may perceive your company as more credible and capable. I know, that’s not really a true measure of how reputable a business is, but it matters to some people—including those who hold the purse strings.

Keep in mind, S Corporations are recognized in most states, but not all. Also, S Corps come with more compliance complexity and paperwork than do sole proprietorships and LLCs.

If you choose to establish your business as an S Corporation, you would begin the process of forming a C Corporation by filing Articles of Incorporation with the state in which your business will be operating. After that, your board of directors must agree to elect S Corporation status for your company by filing IRS Form 2553 (some states might require a similar filing for state tax purposes). To have the S Corp status take effect in your business’s first tax year, you must file Form 2553 within 75 days of your company’s incorporation date.

To make sure you follow the rules and file your information accurately and on time, consider seeking legal and accounting assistance. If keeping costs down and saving time are important to you, consider using a reputable online business document filing service for registering your business and keeping on top of compliance deadlines.

Popular in the Community