what is an s-corporation (s-corp)?

Although most states allow the income generated from an S corporation to be taxed on the owner’s personal tax returns, some states do not. In other words, some states tax an S corporation as if it were a corporation. It’s essential to check with your state’s Office of the Secretary of State to determine how S corporations are taxed. One of the disadvantages of an LLC is when ownership needs an injection of cash or money. If the LLC had been turned down for a bank loan, it could be difficult for the owner to attract money from outside investors.

However, before making any business decision, you should consult a professional who can advise you based on your individual situation. Our best expert advice on how to grow your business — from attracting new customers to keeping existing customers happy and having the capital to do it. Practical and real-world advice on how to run your business — from managing employees to keeping the books. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

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Some states require additional state-specific modalities and requirements to be completed as a prerequisite for the election of Subchapter S tax status. Now that you know the differences between an S-corp vs. C-corp, plus their advantages and disadvantages, you’re well equipped to make a smart choice for your business. S-corps allow many small businesses to save money on taxes, but C-corps give you more options to expand and what is an s-corporation (s-corp)? raise money. Determining if an S-corp is the best tax designation for you and your business is the first step in starting an S-corp. You’ll need to carefully evaluate the pros and cons of S-corp status and make sure your business meets the IRS requirements. Before opting for an S corporation, make sure to check about rules and regulations, and especially tax treatment (and any additional fees and taxes) in your state or city.

  • Additionally, shareholders are not required to pay self-employment taxes on S-corp profit distributions, which can decrease their overall tax burden.
  • An LLC filing as an S corp will have the added step of filing Form 1120S, U.S.
  • Additionally, an S-corp can offer self-employment tax savings for LLC owners since the owners can be classified as employees.
  • But an LLC can also elect to be taxed as an S-corp or a C-corp if it meets certain requirements.
  • To form a new S-corporation, you must first file Articles of Incorporation for an LLC or a C-corporation.

The S-corp’s profits (and losses) are passed through to owners on a pro rata distribution basis, meaning these items are allocated based on each individual shareholder’s proportionate ownership of stock shares. By contrast, the taxable income of a regular corporation is subject to double taxation, first at the corporate level, then at the individual income tax level. There are several organizational forms that businesses can choose from, including sole proprietorship, partnership, limited liability company (LLC), corporation, or an S corporation.

LLC Business Operations

Dividends can be an excellent incentive for employees and help the owner attract talented workers. For LLCs, business operations are much simpler than other corporate structures, and the requirements are minimal. For example, some business types require that bylaws be adopted and annual meetings be conducted, but LLCs are not required to do so. LLCs merely adopt an LLC operating agreement, the terms of which can be very flexible. A limited liability company is a type of legal entity that protects the owner(s) from personal liability for debts and other obligations that a business might incur.

Under the Tax Cuts and Jobs Act, S corp owners may be able to deduct up to 20% of their qualified business income. Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states. Another method is to establish salary compensation as a percentage of net business income; a third approach is to base self-employment income on a percentage of the S Corp’s gross revenue. If you amend your federal return, you also must file an amended Idaho income tax return. The Idaho statute of limitations for receiving a refund is three years from the due date of the return or the date you filed the return, whichever is later.

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Get advice from an accountant before deciding on a tax classification for your business or determining what a “reasonable” salary should be. May cause additional costs related to having employees and running payroll. Unlike limited partnerships and limited liability companies, shareholders of S corporations must divide the corporation’s net income in strict proportion to their shares of ownership. Exactly one-third of the company’s net profit or loss must be allocated to a shareholder who has contributed exactly one-third of the company’s capital. A C corp is a business structure that offers limited liability protection to its shareholders.