Â When raising money for a business, it’s a lot easier to do when you’ve formed a corporation.Â You can sell stock to raise capital and you don’t pay taxes on that money.
With a corporation, it’s easy to sell ownership in the company because you’re using stock that guarantees ease of transferability.Â In a sole proprietorship or partnership, however, everything the individual has must be legally transferred – including accounts, licenses, and permits.Â
Â A corporation also allows owners to transfer partial ownership to others without giving them control over the company.Â If an executive wanted to share the company’s profits with his heirs, then he could give them stock and pay dividends to them.Â
Â An S-Corp is a for-profit entity where the shareholders report the income or loss on his or her personal tax return.Â This is known as “pass-through” taxation.
Â The S-Corp will file an information return every year that lists its income, expenses, depreciation, and other details.
Â Double taxation occurs when a C-Corporation is formed and has to pay taxes generated by the income of the business and then the dividends distributed to shareholders are also taxed.
But after a general Corporation is formed, it can formally elect S-Corporation Status by filing IRS form 2553.Â Then the income is processed similar to a sole proprietorship.
The S-Corp structure is beneficial when the shareholders are employed at least part-time and handle most of the tasks associated with running the business.Â
It’s also crucial that most of the corporation’s income is distributed to the shareholders.Â This is important because the shareholder is responsible for the amount of income the corporation takes in, regardless of whether the company distributes the dividends or re-invests it into the company.
To form an S-Corp, you have to file the Articles of Incorporation first and then complete a Form 2553 to send to the IRS to select S-Corp status by March 15th or within 75 days after the new corporation has been formed.Â
Your corporate entity officially begins at the earliest of these three components:Â 1) The date your corporation began business, 2) The date it issued stock, or 3) the day it owned assets.
You file at the state level and can have a maximum of 75 shareholders, all of whom must be U.S. citizens or permanent resident aliens.Â If a husband and wife both own shares, then they are treated as a single shareholder.
With an S-Corp, you can only issue one class of stock, and no more than 25% of the corporation’s gross income can be derived from passive investment opportunities, such as real estate.
While many S-corps eventually turn into C-Corps once they start seeing a profit, you should be aware that there is a waiting period before you can switch back to an S-Corp if you decide to.