What is an "S" Corporation?

Question

Im hiring this legal service that helps you to become incorporated? One of their questions: "Do you want (_______)
to help you become an 'S Corporation'?" Would I want to become an "S Corporation?"

Answer 1

In general, there are two types of corporations: S-and C-Corp.

The "Subchapter S corporation is used when there is a limited number of shareholders (often, just one). The primary benefit of the S-Corp is that the profit from the business is passed along to the owner(s) as ordinary income. Any losses sustained by the business are a deduction from the tax of the owner(s).

A C-Corporation essentially has double taxation. The profits of the corporation are taxed twice. The business must pay corporate income taxes on the profits of the business. And, when (after tax) profits are distributed to the owner(s), it is taxed once more.

And, any losses to a C-Corp are simply accumulated, and the owners of the business do not get any immediate tax benefit from such a loss.

For nearly every small business that chooses to incorporate, the best route is to have an S-Corp.

Answer 2

If you are a C-Corporation, the IRS wants you to take out minimal salary and pay dividends (cuz that way dividends are taxed at the corporate level and individual level)

If you are an S-Corporation, the IRS wants you to take out max salary and minmal dividends (cuz that way you are paying plenty of social security and med. taxes as opposed to tax free dividends)

More fuss is currently surrouding the S-Corps becuase fewer people want to be C's.

Keep in mind, once incorporated, you are automatically a C Corp, you then have to file an S election to be treated as an S Corp.

Answer 3

Tax "Shelter"