What is an S Corporation?
If you are a small business owner, it may make sense to seek S corp tax status for your company. For many small and mid-sized companies, S corporation status offers important advantages, including the ability to solicit outside investment, permanent existence, protection from liability, and potential tax savings.
Are you considering making your Florida company an S corporation? If so, it is crucial that you have a comprehensive understanding of what an S corp is and how it works. Here, our West Palm Beach business litigation lawyers provide an overview of what you need to know about S corporations.
S Corporations: The Basics
Also known as a subchapter S corporation or a small business corporation, an S corporation is essentially a specialized type of tax status that the IRS grants to qualifying companies. In doing so, the IRS allows S corps to pass their business income directly through to their individual shareholders. In other words, S corporation status allows a company to avoid “double taxation” while still retaining some of the benefits of corporate form.
Requirements for Becoming an S Corporation
In order to become an S corporation, a company must first be structured as either a C corp or a limited liability company (LLC). You cannot simply set up your company as an S corporation. To qualify for this type of tax status, your business must be a C corp or an LLC. Next, you must be able to satisfy all relevant eligibility requirements. Among other things, this includes:
- Registering as a business in the United States (no foreign corporations);
- Only having individual shareholders (no partnerships or corporations);
- Having fewer than 100 total shareholders;
- Issuing only one class of stock; and
- Obtaining unanimous consent for S corp tax status for all shareholders.
For a number of different reasons, S corp status works well for small businesses. The larger a company is, the more complicated it is to become an S corp. Beyond that, a mid-sized or large company may not even be eligible for S corp status.
What is Form 2553?
Form 2553 is the federal tax form that companies use to apply for S corp status. As explained by the Internal Revenue Service (IRS), Form 2553 should be completed and submitted once a company is certain that it meets all relevant eligibility requirements. If you have any questions about Form 2553, an experienced attorney can help.
The Advantages and Disadvantages of S Corps
For qualified companies, S corp status can offer important advantages. Most notably, S corp status has the potential to produce significant tax savings. By avoiding double taxation—meaning a small business may have to pay taxes on its profits and its shareholders may have to pay taxes on distributions—S corp status may save you money. That being said, there are exceptions. In some cases, S corp status does not offer any tax savings. As there are stricter requirements and heightened scrutiny, it is not the best option for every company.
Speak to Our West Palm Beach Business Lawyer Today
At Pike & Lustig, LLP, we are a boutique law firm committed to providing effective, solutions-oriented legal representation to individuals and businesses. If you have any questions about S corporations or business formation in general, we are here to help. For a strictly confidential initial consultation, please call our West Palm Beach office or our Miami office.