If you own a small business, you can request S corporation status for this year by filing a late election. In order to become an S corporation, you’ll need the unanimous approval of all shareholders.
The principal advantage of an S corporation is that you avoid paying double taxes. In a traditional C corporation, profits are taxed at the corporate level and then they’re taxed again when paid to individual shareholders as dividends. In an S corporation, there are no taxes on earnings at the corporate level. Instead, profits or losses flow directly through to the shareholders. They pay taxes only once, when they report their share of earnings on their individual tax returns.
Another advantage: Doing business as an S corporation can be attractive in the early, unprofitable years of a start-up business. That’s because operating losses flow through your personal taxes, perhaps offsetting other taxable income.
There are some trade-offs for these tax benefits, though. If you’re an owner-employee and own more than two percent of the company, you’ll receive less favorable tax treatment for some fringe benefits. There are also ownership limitations. The company can have only one class of stock, there can’t be more than 100 shareholders, all of the shareholders must be U.S. citizens or residents, and the corporation must meet other restrictions.
Despite these drawbacks, doing business as an S corporation can still offer some tax planning advantages. If you can meet the ownership requirements, it might be well worth considering an S corporation election. Contact our office for an in-depth analysis of the pros and cons for your company.