There are many people who consider S-Corporation election when forming their new corporation. An S-Corporation offers both advantages and disadvantages that regular C-Corporations do not, and may be beneficial depending on what type of business you run and how you would like to run that business. S-Corporations operate similarly to regular corporations, but are taxed in a manner that is similar to a Limited Liability Company.
For example, the main difference between an S-Corporation and a regular C-Corporation is that the profits and losses of the S-Corporation are passed on to the various shareholders in the corporation. The shareholders are then taxed on their individual share of the corporation’s profits or losses and report this on their individual tax returns.
All S-Corporations start out their lives as regular C-Corporations. To become an S-Corporation, the corporation must meet certain requirements and file Form 2553 with the IRS. To qualify as an S-Corporation, the following requirements must be met:
· Must have less than 100 shareholders
· Shareholders must be U.S. citizens or resident aliens
· Shareholders must be individuals, estates, certain exempt organizations, and certain types of trusts
· Must have only one class of stock
If these requirements are met, then the shareholder can file Form 2553 to become an S-Corporation. For new corporations, the deadline is 75 days after conducting business, acquiring assets, or issuing stock (whichever is earlier) to file Form 2553 and become an S-Corporation. Existing corporations must file Form 2553 by March 15 of the year they wish to make the election.
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Certain states will not allow professionals to form a C-Corporation. Rather, they may require professionals to form a Professional Corporation organized for the purpose of providing professional services. Generally, these professions include: doctors, lawyers, accountants, architects, engineers and others depending on the state of incorporation.
Liability
Unlike a regular corporation, professionals are not absolved for personal liability for their own acts of malpractice or negligence. Therefore, partners remain liable for their own acts (malpractice) but receive limited liability for malpractice of other partners, tort liability (i.e. slip and falls) and business debts.
Case Study for a Professional Corporation
Omar has just finished his dental residency and is ready to start his own practice. Omar decides to form a corporation to protect his personal assets and give his practice some credibility. However, Omar’s state requires that all health professionals form “professional corporations” because he will be organized for the purpose of providing professional services. Unlike a regular corporation, professionals are not absolved for personal liability for their own acts of malpractice or negligence. Therefore, Omar remains liable for his own acts or malpractice but receives limited liability for malpractice of other partners, tort liability (i.e. slip and falls) and business debts.
S-Corporations operate similarly to regular corporations, but are taxed in a manner that is similar to a Limited Liability Company. For example, the main difference between an S-Corporation and a regular C-Corporation is that the profits and losses of the S-Corporation are passed on to the various shareholders in the corporation. The shareholders are then taxed on their individual share of the corporation’s profits or losses and report this on their individual tax returns.
S-Corp Requirements
All S-Corporations start out their lives as regular C-Corporations. To become an S-Corporation, the corporation must meet certain requirements and make an election with the IRS. To qualify as an S-Corporation, the following requirements must be met:
Must have less than 100 shareholders
Shareholders must be U.S. citizens or resident aliens
Shareholders must be individuals, estates, certain exempt organizations, and certain types of trusts
Must have only one class of stock
Liability
Since all S-Corporations start off life as C-Corporations, S-Corporations have the same limited liability protection afforded to Corporations. Therefore, if a business experiences severe financial difficulties or gets sued, creditors cannot go after personal property such as a home, retirement savings, or any other personal assets. They are limited to the assets of the business.
Case Study for a S-Corporation
Derek has his own consulting business and recently has become concerned about protecting his personal assets. Derek wants to form a corporation for the limited liability protection but is concerned about the double taxation of corporations. Derek much prefers the pass through tax advantages of the LLC but really wants to be an “Inc.” Therefore, Derek looked into S-Corporation election which offers the same pass through taxation as LLCs. Derek formed a corporation and elected S-Corporation status with the IRS. By doing this, Derek has able to still be an “Inc.” while also avoiding the double taxation and having the pass-through tax advantages.