An S-corporation, or S-corp, is different from other business formation structures. LLCs and partnerships, for example, are business entities, while an S-corp is an election taken by business owners for tax status. It is a tax election that can apply to different business formations, such as LLCs and corporations. The name S-corp comes from tax law, because the laws that govern how the Internal Revenue Service (IRS) taxes an S-corp are located in Subchapter S of the Internal Revenue Code.
Why would a business consider this election? A reduction in federal taxes owed.
As noted above, an S-corp is an election that deals with taxation, specifically federal tax issues. This is beneficial for business owners who are worried about double taxation. Double taxation occurs when the IRS taxes business owners first on their profits and again on dividends from their earnings.
With an S-corp status, the tax obligations are “passed through” to the owners, making it more likely there is one, instead of two, taxation events. This can also allow for more flexibility when using deductions for business losses.
There are some important factors that a business owner needs to consider before making election. Businesses generally need to have 100 or fewer owners in order to qualify for S-corp status, and in almost all cases, the owners will need to be individuals (rather than another entity or holding company). These structures can receive closer scrutiny from the IRS. As such, it is wise to complete thorough due diligence before choosing an S-corp election. An attorney versed in business formation can assist you when determining whether an S-election is right for your business.
