Something that every business owner has to do is decide what legal structure they want to incorporate their business with. Incorporating your business is an extremely important first step that ensures that your assets are protected, you receive tax breaks, and your business garners the legitimacy it deserves. There are a few different ways you can incorporate your business, but in this piece we will specifically focus on the value of forming an S-Corporation or S-Corp. An S-Corp is a special incorporation that draws its name from the S subsection of the tax code. To create an S-Corp you must file for S-Corp status with the IRS. S and C-Corps are very similar but vary when it comes taxation. Let’s explore the benefits of forming an S-Corp.
Like an LLC, S-Corps do not pay taxes on the corporate level. Any profits or losses are only reported on the business owner’s personal income taxes. Owners of C-Corps do not avoid corporate taxes in this way and in effect more or less get taxed twice. Losses can also go through to personal income taxes if the individual has a positive basis in the business, if they don’t have a positive basis in the business than the loss is carried forward to future years to be offset by future gains. The catch is that the business owner must pay themselves a reasonable “fair market value” salary in the eyes of the IRS, or else additional corporate earnings may be reclassified by the IRS as wages and taxed accordingly.
Another tax benefit that S-Corps enjoy that LLCs do not is self-employment taxes. Since owners of S-Corps are classified as employees they are exempt from paying self-employment taxes that LLC owners must pay.
The IRS considers S-Corporations to be unique and separate entity from the people that own it. What this means for business owners is that they are not responsible for the business’s debts or actions. Unless, they have signed a personal guarantee. In which case, they can beheld personally responsible for part or all of the company’s debt.
Unlimited Life Spans
Unlike LLCs S-Corporations have an unlimited life span. If you want to be sure that the business sticks around for quite a while than incorporating as an S-Corp is the way to ensure this. Regardless if you leave the company your business will continue to exist in your absence. The business can continue with normal operations without too much trouble even without you present.
An Independent Life Span
Having an S-Corp designation from the IRS allows a business to have its own independent life separate from its shareholders. If a shareholder decides to leave the company or sell their stock in it, an S-Corp can continue normal business functions with little to no disturbance. Being able to maintain the business as a distinct corporate entity establishes clear lines between the shareholders and the business. Ultimately, establishing these clear separations only serves to improve the protection of the shareholders themselves.
At the end of the day, business owners need to decide what incorporating structure is going to work best for them and their business. There are a lot of great incentives to incorporate your business as an S-Corp, and then again maybe there is another model of incorporation that will work best for your needs. The important thing to remember is that S-Corps are flexible and it is a great model for incorporation in a number of different situations and applications. To learn more about the ins and outs of S-Corps please contact Foster Financial for further information.