If you own a small business and have the option of incorporating, you may be wondering whether an S-Corp is right for your company. An S-Corp, or Subchapter S corporation, is a popular form of corporation in the United States. An S-Corp can help protect small business owners from liability for corporate debt and can also help them save money on taxes by passing through profits to shareholders.
An S-Corp is a tax designation for a corporation established in the United States. It is formed by the shareholders of a company, who are also called members.
For example: If you have started your own business and want to file your company as an S-Corp, then you would need to go through this process:
· You file articles of incorporation with your state or local government. This creates a legal entity called “Corporation” that can be owned by shareholders/members.
· As soon as you create an S-Corp, it has all the rights and responsibilities of any other corporation like filing taxes every year, paying income tax on profits, etc. However, these rules only apply if there is more than one member in an LLC (Limited Liability Company). When there isn't more than one member then they don't have any special obligations beyond those applicable for single-owner businesses such as sole proprietorships or partnerships where all owners share equally in both profits and losses
As the name suggests, an S-Corp looks at your business entity level and not at any underlying owner's tax returns. This means that while you will pay taxes on the income earned by your company, individual owners are not taxed on their portion of business profits. Instead, each owner pays taxes on his or her own income from other sources and assumes sole responsibility for paying self-employment tax on those earnings.
The main difference between an S-Corp and a C-Corp is that owners have to establish their ownership percentage and then take a salary based on that percentage. This means that your business isn't taxed twice, but it does mean that you must pay yourself at least the minimum wage. In other words, if you own half the company and make less than the minimum wage, you're still required to pay yourself what the government considers fair compensation.
In addition to establishing their ownership share, owners also decide how much money they want to spend on themselves each year through salaries or dividends; the amount of income retained by the business is not calculated in this decision. Ownership percentages are usually 50% or less for most start-ups unless they are partnerships: if someone owns 100% of their company but wants to take out loans from banks or other lenders in order to grow faster than they could on their own resources alone, then they may end up taking out loans against future profits instead of selling off partial stakes in order not to dilute current shareholder value too much right off right now.
As a small business owner, you can be protected from liability for corporate debt. This is because an S-Corp is a separate legal entity that's not owned by its shareholders, so the owners are not personally responsible for any corporate debt. Instead, the corporation carries all of its own liabilities and debts.
As a shareholder, you have to file your income taxes every year. This can be done as part of your personal tax return or through an S-Corp tax return (if the business is set up correctly).
In addition to paying self-employment tax on their share of profits, shareholders pay income tax on their share of losses and distributions.
If you have no profit to pass through, distribute all of your profits to shareholders, or convert to an LLC or LLP. Otherwise, you'll pay double taxation.
The only way to keep from paying double taxation is if you have no profit to pass through, distribute all of your profits to shareholders, or convert to an LLC or LLP. If that's not an option for you as a business owner (and it's likely not), then there are other ways for you and your company to save money when it comes time for taxes:
An S-Corp it's also known as a pass-through entity because income from the corporation flows through to shareholders and is taxed at their individual rates. An S-Corp has two classes of stock: common shares and preferred shares. Any owner can hold both types, but if one buys only preferred shares, he or she does not receive voting rights.
Shareholders have to file their income taxes every year and pay self-employment tax on all net earnings up to $128k per year ($160k if married). They can also take health insurance deductions on behalf of themselves and any dependents they support. The self-employment tax rate is 15 percent on the first $118k in net earnings (single filers), while married couples are subject to this rate until they reach $212k combined net earnings ($240k if filing jointly). The remaining balance; any amount over $128k or $112k, will be taxed at ordinary rates with no additional deduction for health care costs unless someone qualifies for an itemized deduction based on having out-of-pocket medical expenses exceeding 10 percent of AGI (adjusted gross income).
The S-Corp is a great option for small business owners who want to minimize their taxes and protect themselves from liability. However, this type of business structure will not eliminate the need to pay self-employment tax.