So What is S-Corp?
S-corporation also known as the small business corporation has some tax benefits that appeals mainly to small business owners. It also provides protection for owners against liability for the corporation.
S-corp is like a stripped down 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 created in 1958 to help encourage small and family businesses start-up
Attributes of S-corporation
Taxation: There is no requirement on the corporation to pay tax on income generated by the entity as taxation flows through to the shareholders’ personal income tax returns.
Transferable interest: Shareholders are free to sell their interests without the formal approval of other shareholders.
The shareholders do not pay self-employment tax on profits allocated to them but only on salary and bonuses.
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 personal tax returns.
No double taxation on income: The income is not taxed twice – once as business income and again as dividend 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: As against C-corp which submits tax every three months.
The disadvantages of S-corporation
Only US citizens and permanent residents: Unlike the C-corp and LLC (Limited Liability Company), you must be a legal resident of the United States
Ownership is limited. S-corp can not have more than 100 shareholders.
Formation and operational costs: S-corp is very expensive to incorporate and maintain. You need to pay an agent who will represent your company and many states impose ongoing costs such as annual reports and / or subscription taxes.
Tax obligations: Errors in tax filling can inadvertently lead to the termination of your S-corp license.
IRS scrutiny: Payments made to employees and shareholders can be distributed as either wages or dividends. Everyone is taxed differently, leading the IRS to examine more closely the distribution.
S Corporation vs. C Corporation
What is an S-corp?
As previously described, the S-corp is something like a light version of C-corp. That is when considered the growth potential and organizational structure.
All businesses that file for the corporation is firstly classified as C-corp. Once that is completed, then you have to file for subchapter S-corp and satisfy all requirements for S-corp status – namely, you have less than 100 shareholders who are individuals, not companies; They have one class of shares, And that is owned by US citizens or residents. These are easy requirements for most small businesses.
Back to the benefit of saving money. S-corp is not subject to double taxation as the C-corp. This means that the income of the S-corp is not taxed at the corporate level. Only taxed when they are paid as salary or dividends to shareholders. 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 an expert accountant as a little error in the filling can send your company back to the C-corp status, leaving you to be taxed twice.
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 name’s availability. This ensures that the name of your choice is 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.
Contact Green Tree Tax Services of Houston if you need help anytime
Create bylaws to provide guidelines for operating the Texas S-corporation. The state does not impose any guideline on the content of the bylaws of the company. Include the date and place of business meetings, the criteria for choosing the company directors, duration of service, functions and compensation of corporate officers.
Get an Employer Identification Number from the Internal Revenue Service or IRS. The fastest way to get an EIN is to apply online on IRS site or by calling IRS business tax desk. Communicate 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.
File Form 2553 with the IRS. You can get the 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. Provide signature and title of officer of the company.
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