Choosing the type of business entity that will work best for your company can be a confusing and frustrating process. With so many choices, it can be challenging to know which one will give you the most bang for your buck while also allowing your business to thrive.
Perhaps you have already eliminated certain entity types from consideration and are now leaning toward one or two. If one of them happens to be an S corporation, the following information may help you make your decision.
Who can be part of your S corporation?
In order to form an S corporation, your business can only include the following shareholders:
- Certain trusts
- Certain partnerships
- Tax exempt charitable organizations
Another S corporation may also be a shareholder, but only if it serves as the only shareholder of the business. In addition, your company can only include up to 75 shareholders. Fortunately, a married couple only counts as one.
How does the IRS tax an S Corporation?
Even though you receive the same liability protections under this entity type as given by a C corporation, you do not face the same double taxation. The losses and income of your company pass through an S corporation directly to the shareholders, which must be reported on an individual's income tax returns.
Some advantages of an S corporation to consider
Other than the personal protection from liability, you may enjoy other benefits of an S corporation as well. It only takes one person to form this type of entity. Shareholders can sell their stock in the company without first obtaining permission from directors or other shareholders. You may also enjoy certain self-employment tax benefits through this type of corporation as well.
Some disadvantages of an S corporation to consider
If you don't like paperwork or following legal formalities, an S corporation may not work for you. You must adhere to the following requirements for this type of corporation:
- File articles of incorporation
- Issue only common stock
- Hold shareholder meetings
- Hold directors meetings
- Allow shareholders a vote on major decisions
- Keep corporate minutes
If you fail to follow these guidelines, you could lose your status as an S corporation. If that happens, you could find yourself on the hook to pay taxes as a "normal" corporation does. Speaking of the IRS, you must make your subchapter S corporation election within a certain amount of time to receive its benefits.
Answers to further questions about an S corporation
More than likely, the information provided in this article only raised additional questions regarding the establishment of your business. In order to get the answers you need, it may be worthwhile to sit down with an Ohio business formation attorney.
Once you have all of the answers necessary to make an informed decision, you may decide that maintaining a relationship with an experienced attorney could make your life easier as you work to remain in compliance with the paperwork and other legal requirements of an S corporation. This way, you and your company can reap all of the benefits of the type of entity.