Blog

Home » Blogs » What is an S Corp?

What is an S Corp?

If you are considering forming a business entity, you may be wondering “what is an S corp?” An S corporation is a regular corporation that meets certain criteria specified by the Internal Revenue Code and elects a special election under Subchapter S of the Internal Revenue Code. An S corp is a pass-through entity. If the corporation qualifies under the S subchapter, income is passed directly to the shareholders without having to pay corporate-level federal taxes on the profit. S corp status allows a business to have the same advantages of incorporation while enjoying the flow-through taxation of a partnership.

How to Set up an S Corp

An S corp is not a business structure unique from a Limited Liability Company or a Corporation — it is an IRS tax designation that can be used to change a Corporation from a separate taxpayer to a flow-through entity. Either a corporation or a Limited Liability Company can be an S corp. In order to obtain tax treatment under subchapter S, you must first form an entity then elect S corp status through Form 2553.

To qualify and maintain S corp status, an entity must meet the following requirements:

  • Have only one class of stock
  • Have 100 shareholders or fewer
  • Shareholders must be U.S. citizens or have permanent residency status
  • Be registered as a domestic entity
  • All shareholders must agree to S corp status

Unlike a corporation which is taxed in the regular course of business under Subchapter C, C-Corp corporate tax is not imposed on an S corp. Rather, each stockholder is responsible for paying taxes on the corporation’s profits.

Advantages of Setting up an S Corp

There are numerous advantages to forming an S corp. Operating as an S corp has several crucial tax benefits, despite close scrutiny by the IRS. S-corps enjoy flow-through taxation.  S-corp shareholders are entitled to draw salaries, as well as receive dividends and other distributions.

What are the Disadvantages of an S Corp?

Significantly, mistakes made regarding filing requirements, stock ownership, or any aspects of S corp formation or maintenance of S-corp requirements can result in the termination of S corp status. There is also less flexibility concerning the allocation of income and losses due to the fact that S corps are only permitted one class of stock.

While there are many tax advantages to forming an S corp, the arrangement can also bring several critical disadvantages. For example, unlike with a C corporation, the income of each S corp shareholder is taxed — regardless of whether it is reinvested or distributed to the shareholders. The IRS also requires S corps to pay reasonable salaries to all shareholders, even if no profit has been made.

Contact an Experienced New York Business Attorney to Learn More

If you are forming a new business and want to learn more about what is an S corp, it’s integral to have a business attorney on your side who can provide strategic guidance and insight. Brinen & Associates has extensive experience counseling clients regarding the appropriate form of entity and preparing the necessary documents to help ensure the success of your company. Call (212) 330-8151 or send us a message to learn how we can help.  

PRACTICE AREAS

RECENT POSTS

No Results Found

The page you requested could not be found. Try refining your search, or use the navigation above to locate the post.