What is an S-Corp?

The simple answer is an S-corp is a federal tax structure used by business owners to manage their tax liabilities.

When should a business Elect to be an S-corp?

A business should make this election based on which state the business is located in as well as the amount of profits. This is because each state has different rules and regulations regarding S-corp taxes. As well, an s-corp requires maintenance and more paperwork and filing for compliance with the IRS. In turn this can result in a higher accounting bill. Overall consult with your accountant on when is the right time to make this step.

What is the difference between an S-corp and an LLC?

The Simple answer is that one is a federal tax structure and the other is election done at the state level to structure the share and your board member. At at high level there are three ways a business can get taxed.

1. Sole proprietorship

2. S-corp

3. C-corp

All business entities whether a partnership or an LLC will be taxed as a sole proprietorship. An Inc will start being taxed as a C-corp. To change tax structures all entities must either file a form 2553 (elect to be an S-corp) or a form 8832 (elect to be a disregarded entity) to change the federal tax structure.

What are the taxes on an S-corp?

An S-corp is a pass through tax structure. What this means is that the shareholders of the S-corp pay the income taxes. So an S-corp’s tax rate can be very low if the share holders tax rate is low but if a shareholder is in a top tax bracket, that means any additional income from the S-corp, is taxed at that tax rate.

So for higher earning individuals and individuals with higher tax rates S-corps are not always recommended.

What is the Compliance for an S-corp?

1. Shareholder Salary

2. Yearly shareholder meeting with minutes

3. Well documented job roles for share holders and employee

4. Yearly Tax filing of form 1120-s