Starting a business is an exciting endeavor, but it also comes with a lot of uncertainty. Business owners want to be sure that they have structured their company in the most efficient way and taken advantage of all the opportunities available to them. Establishing an S Corporation (S Corp) can have numerous benefits for eligible businesses.
Understanding S Corp Classification
The Internal Revenue Service (IRS) uses four business classifications: sole proprietorship, partnership, C corporation, and S corporation. S Corp designation was created in 1958 to encourage the creation of small businesses by alleviating some of their tax burden. Under an S Corp, the corporation itself has no tax liability; instead, the profits pass through to the owner(s) and are taxed as personal income. This is an enormous relief for business owners who would otherwise have to pay both business taxes and income taxes on the same profits.
A business owner is required to pay themselves a comparable salary to what a non-owner would be earning in the same role. They will still be responsible for self-employment tax, including Social Security and Medicare, on their salary and compensation, but not on the business’s profits. Business owners can also shield their personal assets from the company’s liabilities under an S Corp. If the business’s profits will far exceed the owner’s reasonable salary, it is very beneficial to establish an S Corp.
S Corps and LLCs
There are some important distinctions between an S Corp and a limited liability company (LLC). An LLC refers to a business that is considered a separate entity from its owner or owners. It is a type of business entity, unlike an S Corp, which is simply a tax classification – a business can therefore be both an LLC and an S Corp, if it is properly registered. This allows LLCs to take advantage of S Corp tax benefits, instead of the default sole proprietorship or partnership.
In order to register as an S Corp, a business must meet certain qualifications. The business must be U.S.-based and is limited to one class of stock. There cannot be more than 100 shareholders, and they must all be US citizens; partnerships or corporations cannot own shares of an S Corp. Certain types of financial institutions and insurance companies are not eligible for S Corp classification. If a business aims to be traded publicly or expand internationally, an S Corp might not be the best option.
Working with a Business Lawyer
Having an experienced business lawyer on hand is crucial when establishing and maintaining an S Corp. A business lawyer can advise new business owners on the best options for them – whether they are eligible to become an S Corp, if they should form an LLC, and how to structure their compensation to maximize tax benefits while staying IRS compliant. An error in the business’s creation or in future filings can force a business to revert to C Corp status, which can seriously impact its tax liability.
Philadelphia Business Lawyers at Harty Law Group Get Results for New Business Owners
The experienced business lawyers at Harty Law Group help business owners avoid costly mistakes and operate as efficiently as possible. Armed with the latest technology and many years of experience, we have the knowledge and resources to set businesses up for success at the outset. With offices conveniently located in Philadelphia and Haddonfield, we help business owners throughout Pennsylvania and New Jersey find creative solutions that work for them. Call us today at 267-262-5650 or contact us online to speak to a Philadelphia business lawyer.