What is S-Corp and to Start one?
Generally, S-corporation also is known as a small business corporation. Don’t hesitate to contact us when you are in need of corporate tax preparation.
It has some tax benefits that appeal mainly to small business owners. Additionally, protects owners against liability for the corporation. Similarly, S-corp is like a version of the C-corp. It offers investment opportunities, continuous existence, and protection of limited liability. But unlike a C-corp, S-corp files taxes each year, and are not subject to double taxation.
S-corp was crafted in 1958 to help encourage small and family businesses to start-up.
Attributes of S-corporation
Taxation: Firstly, there is no requirement for the corporation to pay tax on some income. That is the income into the S-corp through to the shareholders’ income tax returns.
Transferable interest: Secondly, Shareholders are free to sell their interests without the approval of other shareholders.
The shareholders do not pay self-employment tax on profits. Meanwhile, they are responsible for capital gains tax on their shares.
Some advantages of S-Corporation
- Limited liability: Directors, shareholders and company employees enjoy the protection of limited liability.
- Pass-through tax: Owners report their share in the profits and losses on their tax preparation.
- No double taxation on income: Only pay taxes once on employee income level. This is unlike C-corp, which is taxed once on business income and again on individual income.
- Investment opportunities: The company can attract investors through the sale of shares.
- Durability: The company continues to exist even if the owner leaves the corporation or dies.
- Annual tax filing: Finally, report income taxes once at the end of the year.
The disadvantages of S-corporation
Only US citizens and permanent residents: First, Unlike the C-corp, you must be a legal resident of the United States.
Ownership is limited: Second, S-corp can not have more than 100 shareholders.
Formation and operational costs: Third, S-corp is very expensive to incorporate and maintain. So, you need to hire a registered agent for your company. Consequently, many states impose ongoing costs such as franchise tax, county tax, unemployment tax and many more.
Tax obligations: Errors in tax filling can inadvertently lead to the termination of your S-corp license.
IRS scrutiny: Payments to employees and shareholders can be either wages or dividends. Leading the IRS to examine more closely and run into the IRS audit problems.
S Corporation vs. C Corporation
So what is an S-corp?
As the previous conversation, the S-corp is something like a light version of C-corp.
All businesses that file for the corporation are classified as C-corp. Once that is complete, then you have to file for subchapter S-corp and satisfy all requirements for S-corp status. To satisfy this you will submit the forms to the IRS. Also, you have less than 100 shareholders who are individuals, not companies. And, they have one class of shares, and that is owned by US citizens or residents. In this case, these are some easy requirements for most small businesses.
Importantly, back to the benefit of saving money. S-corp is not subject to double taxation as the C-corp. This means you pay taxes when they are paid a salary. For example, this alone could save hundreds of thousands of dollars for the corporation. For this reason, S-corp makes sense for small businesses. But, if you opt for the S-corp, make sure you have a tax professional helping you.
Forming S Corp in Texas
Contact the Secretary of State in Texas to conduct a name check. Use the Secretary of State of Texas’ online SOS direct database to check the name’s availability. This ensures that the names of your choice are not that of an already existing company registered with the Secretary of State of Texas.
Print out Form 201, also known as certificates of formation from the Texas Secretary of State website. Call the Secretary of State to send Form 201 by mail or pick up the form in person at the office of the Secretary of State of Texas.
Fill out the form 201. Please indicate the name and address, the name of the person or business address that will accept the S corporation legal documents from Texas. communicate the names and addresses of each would-be directors of the company. Specify the initial number of shares the Company is authorized to issue and the minimum selling price of each share. Provide the aims and objectives of the business, and the name and address of each organizer responsible for creating the company. Including the signature of each organizer.
Send form 201 to the Secretary of State of Texas. Fill out the form on the Secretary of State of Texas’ website. You can also send by mail, fax or return the form by hand. At the time of writing this article, it costs $300 to file Form 201 to the Registrar of the State of Texas. Also, there is usually 25$ for express service.
Contact Green Tree Houston tax masters.
Create bylaws to provide guidelines for operating the Texas S-corporation. The state does not impose any guidelines on the content of the bylaws of the company. However, include the date and place of business meetings. Additionally note the criteria for choosing the company directors, duration of service, functions, and compensation of corporate officers. These are called minutes of the meeting.
Also, don’t forget to obtain an Employer Identification Number from the Internal Revenue Service. The fastest way to get an EIN is to apply online on the IRS site and by calling the IRS business tax desk. Register the name and address of the company, describe what the company does and the number of its employees. Provide the name, address and social security number of the authorized person. The IRS will issue an EIN to your company when you have submitted all the required documents.
Lastly, file Form 2553 with the IRS. You can download form 2553 from the IRS website. Indicate the name and location of the company, date of establishment, EIN and the state of incorporation. Include the name, address, and signature of each shareholder and director. Provide signature and title of officer of the company.
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