Generally the best option for business operations, whether your income is related to a product or service the S Corporation provides the one thing an LLC does not provide… tax savings. For asset protection a properly structured S-Corp is generally undercapitalized and structured financially to be little more than a “shell”, creating an entity with income, even substantial income, but limited assets. This structure creates limited liability for the shareholder similar to a standard corporation but limits both taxes and liabilities of the entity beyond what is available to a standard corporation.
For business operations we form more S Corporations than any other entity.
An S Corporation is formed by setting up a standard (C) corporation in the State of incorporation and making a S-election with the IRS, this provides a single level of passthrough taxation very similar to that of a partnership.
Once the S-Corporation election is made with the IRS, the entity does not pay corporate-level taxes. Profits are passed through to the shareholders, who pay personal income tax on the profits. The huge advantage here the ability to split earnings between salary and dividends, this allows the owner/entity to potentially save thousands, or tens of thousands, of dollars each year in self-employment tax (FICA), turning those FICA tax dollars into “take-home” profit dollars.
Recommended in situations
- Consulting and Professional Service providers. (as alter ego)
- Income is from the sale of products.
- Net income level exceeds $50,000 annually.
- Desire to reduce taxes and increase retirement contributions.
Not recommended for the following situations:
- Where multiple shareholders wish to distribute income creatively.
- For rental / real estate holdings. (see LLC page)
- Business with net income of less than $50,000. (see LLC)
- All shareholders do not desire the same level of fringe benefits.
Book a consultation with an attorney to discuss your entity requirements and solutions.
- Use your corporate name on all legal documents
- Annual tax filing – IRS form 1120S
- Record annual minutes
- Must maintain “Corporate veil”
- Separate accounts (checking, credit card, etc.)
- Bookkeeping (minimal but required)