S-corporation

One sort of legal corporate structure that is popular among small businesses is the S corporation, commonly referred to as an S corp or S subchapter. Another is a limited liability company (LLC). Due to the restrictions of an S corp, a corporation with 100 or fewer shareholders can benefit from incorporation while still paying taxes as a partnership. S corporations and LLCs are both pass-through companies, which means they don’t pay corporate taxes and provide their owners and principals with limited liability protection. LLCs, however, offer more flexibility. Individuals, specified trusts and estates, or tax-exempt organizations may be S company stockholders. The Internal Revenue Service (IRS) has laws controlling the number and type of members, which are often sole proprietors or small groups of professionals. LLCs are exempt from these rules.

An S-corporation may require the following forms:

1. Income tax:
   1. Form 1120S, U.S. Income Tax Return for an S Corporation
   2. Form 1120S Sch. K-1, Shareholder’s Share of Income, Deductions, Credits, etc.
2. Estimated tax:
   1. Form 1120-W, Estimated Tax for Corporations
3. Employment taxes:
   1. Form 941, Employer’s Quarterly Federal Tax Return
   2. Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees
   3. Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

Source: Internal Revenue Service

The individual shareholder may require the following forms:

1. Income tax:
   1. Form 1040, U.S. Individual Income Tax Return
   2. Schedule E, Supplemental Income and Loss
   3. Other forms referenced on the shareholder’s Schedule K-1
2. Estimated tax:
   1. Form 1040-ES, Estimated Tax for Individuals

Source: Internal Revenue Service

Conclusion

S companies are a popular legal structure that is suggested for small businesses. They offer limited liability protections for companies along with the tax benefits of partnerships. They are less complicated to set up and keep in operation than standard C corporations, serving as a sort of “corporate lite” form.

S corporations must follow many of the rules and pay many of the fees associated with traditional corporations, beginning with the fees and formalities for incorporation. They require more time and money to set up and manage than LLCs, another common small-business structure.

Although helpful for rapidly expanding businesses, they are nevertheless subject to specific IRS limits on their size and stockholders, which may ultimately restrain growth. The good news is that, should business circumstances let it, an S corp can convert to C corp status rather easily.

The tax laws are very complex. Our short blog articles cannot cover in full all the nuances of the rules. Your specific facts may hold various opportunities and possible risks that only trained, experienced, and highly qualified tax specialists can spot. We encourage you to find such help, rather than trying to figure it all out on your own. Consider giving this marketplace a try by posting your project and signing up here.

If you are a licensed tax professional and are interested in helping others either part or full-time, or ad hoc, come on in! Happy to have you. Our marketplace has the full suite of tools to communicate with clients including compliance calendars, task and message management, and billing. You can also quickly connect to knowledgeable colleagues who can complement your services with the ones you do not provide. Register here.