Among the multiple business structures the Limited Liability Company and the S-Corporation are two of the most popular, but is it worth it to elect for S-Corporation treatment for tax purposes? Contrary to popular belief an S-Corp is not an entity that is set up like an LLC or Corporation, rather it is a tax designation that owners of LLCs or Corporations may elect. Electing for your business to be treated as an S-Corp for tax purposes allows gains and losses of the business to flow through the corporate entity to the business owners who report the gains and losses on their individual tax returns.
Before your company can be designated as an S-Corp, however, you must ensure that it meets the four requirements of an S-Corporation. First, the corporation or LLC must be a domestic entity. Second, the corporation must be owned only by “allowable shareholders.” You may not elect your business for S-Corp treatment if it is owned by another corporation, a partnership, or nonresident aliens. Third, the corporation must not have more than 100 shareholders. Fourth, there must be only one class of stock issued. After ensuring your business meets these requirements you may elect for S-Corp designation.
Before deciding whether to elect for S-Corp treatment Consider the following pros and cons of an S-Corporation:
Before deciding to elect for S-Corp designation for tax purposes be sure to consult with your tax and legal advisors to ensure you are making the correct decision.
If you are starting a new business and not sure where to start, check out our video and blog post entitled: 6 Key Steps to Starting a Business
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