Electing to File as an S Corp

We get it: tax planning can be down right confusing, but understanding the various business structures available and selecting the right one for your needs can lead to significant tax savings and other benefits. One such option is electing to file as an S Corporation (S Corp), which offers unique advantages for small businesses. We're here to guide you through the process of filing as an S Corp and explain why it may be the right choice for your small business.

What is an S Corporation?

An S Corporation is a type of business structure that combines the limited liability protection of a corporation with the tax benefits of a partnership or sole proprietorship. Unlike a traditional C Corporation, which is subject to double taxation (once at the corporate level and again at the shareholder level), an S Corp passes its income, losses, deductions, and credits through to its shareholders, who report them on their individual tax returns.

Advantages of Filing as an S Corp

There are several key advantages to filing as an S Corp for your small business:

• Pass-Through Taxation: Perhaps the most significant advantage of an S Corp is its pass-through taxation structure. By passing income and losses through to shareholders, S Corps avoid double taxation and allow owners to report business income on their personal tax returns at individual tax rates, potentially resulting in lower overall taxes.
• Limited Liability Protection: Like C Corporations, S Corps offer limited liability protection to their shareholders, meaning that shareholders' personal assets are generally protected from business liabilities. This can provide peace of mind and financial security for business owners.
• Tax Savings Opportunities: Filing as an S Corp opens up opportunities for tax savings beyond pass-through taxation. For example, S Corp shareholders who are actively involved in the business may be able to receive distributions of profits that are not subject to self-employment taxes, potentially reducing their overall tax liability.
• Flexibility in Ownership Structure: S Corps can have up to 100 shareholders, and they are not limited to individuals—other entities such as trusts and certain types of tax-exempt organizations can also be shareholders. This flexibility in ownership structure makes S Corps an attractive option for small businesses with multiple owners or investors.
• Enhanced Credibility: Operating as an S Corp can enhance your business's credibility and professionalism in the eyes of customers, vendors, and potential investors. This can lead to increased trust and confidence in your business, which may open doors to new opportunities and partnerships.

How to File as an S Corp

Filing as an S Corp involves several steps:

• Incorporate Your Business: Before you can elect S Corp status, you must first incorporate your business as a corporation by filing articles of incorporation with the appropriate state agency.
• Elect S Corp Status: Once your corporation is formed, you can elect S Corp status by filing Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service (IRS). This form must be filed within a certain timeframe and meets specific eligibility requirements, so it's essential to consult with a qualified accountant or tax professional to ensure compliance.
• Maintain Compliance: As an S Corp, you'll need to comply with certain ongoing requirements, such as holding regular shareholder meetings, keeping accurate financial records, and filing annual tax returns with the IRS and state taxing authorities.

Filing as an S Corp can offer small businesses significant tax advantages, limited liability protection, and flexibility in ownership structure. By understanding the benefits of S Corp status and following the necessary steps to elect this tax classification, you can position your small business for long-term success and tax efficiency. As always, consulting with a knowledgeable accountant or tax professional can provide personalized guidance tailored to your specific circumstances and help you make informed decisions about your business structure. So, if you're considering filing as an S Corp, don't hesitate to contact us to discuss this option and unlock the potential benefits for your small business.