S Corporations

 

Monthly

Newsletter

Some helpful insight - A monthly newsletter form Robert Reinert Consulting 


“S” Corporations

What is an "S" Corporation?

When you establish your business operations you must consider what legal structure your business will be. Considerations should include: limited liability from law suits of customers and associates, limiting the amount of taxes you pay on business income, and how you define the allocation of ownership and allocation of profits. An "S" corporation provides the best answer to all of these questions for a small business owner because it provides limited liability of a corporation, it saves owners from double taxation as is the case with a regular "C" corporation, and it allows ownership and profit allocation through the issuance of stock.

What is the advantage from other structures?

"S" corporations do file tax returns but do not pay income tax. The taxes are assessed on the owners' share of the profits allocated to them as it is reported on the "S" corporations form K-1. This income is treated basically as dividend income to the owners so there is no self-employment tax assessed.

So the owner avoids self-employment tax?

If the owners only distribute profits and don't pay salary, which would require Social Security and Medicare taxes equivalent to self-employment taxes, then they only pay income taxes on the profits in the form of dividend income. This allows the owners to avoid self-employment taxes. However, there are exceptions to this rule. It is called the “reasonable compensation” rule. Small businesses starting out have to stabilize there income first in order to determine a reasonable salary. This can be done within the first or second year depending on the level of income and many other circumstances. An Experienced CPA is the best person to make a determination for you, regarding when and how much salary should be paid.

Are there any other advantages?

Losses are passed through to the owners as well. This is deductible against all other income on the owners' personal tax return in the current year. A regular corporation carries the losses to years when they can be offset against profits, which does not give the owners current year relief from tax liability that the "S" corporation provides.

Why wouldn't everyone want to be an "S" Corporation?

The reasons depend on the circumstances. The tax bracket of the individual owners and the level of income the "S" corporation is generating could be a consideration for restructuring. The ownership and the related profits those owners generate from their respective business segments may require a different structure, because profits of an "S" are allocated strictly on percentage of shares owned and no other determining factor. Initially an "S" corporation may be a great way to go, but as the business grows, a review of the tax advantages and other nontax matters should be made to determine what works the best for the organization for meeting its long term goals.

Other considerations?

Sole proprietorship is an easy form of starting a business but provides no liability protection as a corporation or LLC does, and it is subject to self-employment taxes on its profits as is the case with Partnerships and LLC's. Regular corporations are not recommended for small startup businesses because they are subject to double taxation and in many ways are not as flexible as an "S" corporation.

Visit our website: https://www.rreinert.net/

Prepared by: Robert Reinert, CPA Indio, CA

 

43221 La Scala Way, Indio, CA, USA

760-342-0913

Comments

Popular posts from this blog

Monthly Newsletter Office in the Home

Newsletter Budgeting