S-Corp Facts

S Corps (S-Corporations) are like LLC’s (Limited Liability Companies) because they offer owners some limited liability for debts incurred by the business and for taxes they are treated as partnerships.

The primary reasons for incorporating most businesses are:

1. Protect personal assets in the case of legal action taken against your company.
2. Having pass through taxes where the profits and losses of the business flow through to the individual tax returns.

For a long time the S-Corp was the only option for business owners wanting these things. Recently the LLC has given business owners another option.

What is an S-Corp?

• An S-Corp is a profit corporation that has elected a status with the IRS known as S-Corp, S-Corporation, or Subchapter S corporation.
• S-Corps allow owners to receive the benefits of being a corporate shareholder but pay tax as if you had a sold proprietorship or a partnership.
• Without choosing an LLC or a S-Corp a profit corporations income is taxed at the corporate level. There is no “flow-through”. Owners also pay tax on money they’re paid by the corporation in the form of salary, bonuses and dividends.
• S-Corps are allowed to avoid this duplicate taxation by allowing owners to pass-through the profits to the owners that report on their individual tax returns.
• S-Corps typically don’t pay any taxes themselves – depending on the state they are registered in.

Why would you choose to make your business an S-Corp?

• As already discussed – tax advantages – avoid double taxation and allow pass-through of profits and losses at individual tax level.
• Any gain on sale of your S-Corp might be less than if your business was a profit corporation without LLC or S-Corp status.
• S-Corp shareholders are not taxed with self employment taxes – over 15% of your income.

S-Corp Rules

• S Corp shareholders must be a U.S. citizen or resident.
• No more than 100 shareholders are allowed in an S-Corp.
• S Corp profits are not flexibly distributed as they can be assigned in LLC’s. They can only be distributed in proportion to each investor’s interest in the corporation.
• S Corp shareholders cannot deduct losses that are more than their “basis” may not deduct corporate losses that exceed his or her “basis” in corporate stock. The basis is the amount of the investment held in the company.

Can I change my S-Corp to a regular Profit Corp if I choose?

Yes. If at some point during the life-cycle of your business you find that it would be to your advantage monetarily to be a regular corporation – you can choose do do that.

If you file a profit corporation or a Subchapter S (S-Corp) here at Start Oregon Business we will help you apply for S-Corp status with the IRS – at no charge.