When launching a new business, entrepreneurs must decide on what structure they want to give the new business entity. Should it be a sole proprietorship, a partnership, an LLC or a corporation? Each format has its own advantages and disadvantages. One popular option for small businesses is the S corporation.
The S corporation, or S Subchapter corporation, is an IRS business designation for companies with 100 shareholders or fewer. It is sometimes described as a cross between a corporation and an LLC and shares some of the tax advantages of each.
Unlike other forms of corporation, an S corporation can directly pass business income to the shareholders, thus allowing the income to be taxed at lower personal income rates, rather than at a corporate rate. Losses, deductions and credits can also pass on to shareholders for tax purposes. There are other tax advantages as well.
S corporations have a number of special requirements. They can issue only common shares, and the shareholders must be individuals, certain types of trusts or estates, or certain types of tax exempt organizations. This type of corporation also faces some strong scrutiny from the IRS, and must work carefully to ensure it complies with all laws and regulations.
An experienced attorney can help entrepreneurs to review their options for business formation and decide on the type of entity that is right for them. An attorney can also help with compliance, strategic planning and more, so that the new business starts off on the road to success.