There is no way around it. If you have a business, you pay taxes. But do you want to be taxed twice? Of course not. You want to pay it once and be done with the tax burden. This is possible with an S Corporation structure for your business. It is just one of many benefits to the S Corp structure.
So, what are the gains of structuring your business as an S Corp?
In most states, there are tax advantages for both the corporate and self-employment levels. It is not connected to any individual, which gives it unlimited life, and is easy to sell. S Corp structure also protects the personal assets of shareholders from creditors.
The requirements for S Corporation include having no more than 100 shareholders, only one type of stock, housed in the U.S., and being an eligible corporation. The shareholders must be US citizens or permanent residents as well as certain trusts, estates, and tax-exempt organizations.
So, What is an S Corp?
The S Corporation is part of the Internal Revenue Code, Chapter 1, Sub-chapter S. This structure allows corporate tax losses, deductions, income, and credits to be passed to shareholders. Instead of the people in the business paying both corporate and personal taxes, the S Corp structure bypasses the corporate level taxes and shareholders only pay personal taxes at normal rates.
No one person owns a business in the S Corp structure. This means that it can exist no matter who is in the main office. Unless the business violates the requirements set forth by law, an S Corp can remain indefinitely.
So, What are the Advantages of an S Corp?
The biggest advantage of structuring your business as an S Corporation is the tax savings. You do not have to pay corporate taxes because you are allowed to file business credits and deductions as your personal income, which you would have to file anyway. You also save on self-employment taxes because you are allowed to split business income into salary and distribution, with only salary being taxed. This split creates significant savings in taxes you would otherwise have to pay.
The S Corp structure also protects your personal assets. Creditors cannot use your assets to pay debts and cannot hold shareholders liable for debts. Selling your S Corp business is also much easier to do than with other types of corporations, so you have tax advantages, protection from creditors, and flexibility with ownership.
Related Questions
So, What is the Difference Between S Corp and LLC?
An LLC is owned by a specific person and can have more than 100 shareholders as well as more than one class of stock. It does have to pay corporate taxes and cannot pass them along to shareholders, and the entire business income is subject to self-employment tax when applicable because the split of salary and distribution is not part of this structure.
What Else Should I Know about an S Corp?
The regulations governing the S Corp structure are strict. All requirements must be kept one hundred percent of the time to keep this status. Detailed bookkeeping, meetings with shareholders, and formal by-laws are a few of the hoops to jump through to retain S Corp status. Making sure the split of salary and distribution is done fairly is important, so you do not attract unwanted attention from the IRS.
Hiring a CPA or accounting firm such as Tax Avenger in Canton is wise when it comes to running a business. Staying compliant while maximizing benefits and limiting liabilities is achievable when an accounting firm handles your bookkeeping, tax preparation and tax planning.
In Sum
Business is all about making money, and the tax benefits with an S Corp structure help you keep more of it in your pocket. It doesn’t work with every business model, but if yours fits the requirements, it could be a great match for keeping taxes down and your assets protected.
Our team is extremely knowledgeable and well versed in local Michigan as well as Federal tax laws ensuring compliance and minimizing tax liability. We also provide bookkeeping services and advising, payroll services, tax preparation and planning and so much more.
Get in touch with our Canton area tax and accounting firm to schedule a Free Consultation!