What is an S Corporation?
I'm in the process of starting my own business. During my research, I've stumbled across the terms C-Corporation and S-Corporation. Not sure which of the both would be the better choice for me, it will be a one-person business, but I'm looking to bring in some investors at a later point in timeThe term "S company" refers to a "Subchapter S corporation," or more often, a "Small Business Corporation." It is a special tax status provided by the IRS (Internal Revenue Service) that enables companies to pass on taxable taxes, allowances, and deductions to shareholders.
S companies, in general, do not collect federal income taxes. Rather than that, the company's private owners divide the profits (or losses) among themselves and record them on their individual income tax reports.
The S company status enables companies to escape double taxation, which occurs when an enterprise is charged on both the corporate and individual levels. In the absence of corporation tax, the S corp "tax rate" is equal to the tax class in which the company owner's personal income falls.
Bear in mind that the term "S company" refers to a tax classification, not a specific form of corporate enterprise. As a S company, you cannot 'incorporate.' To become one, you must submit an application to the IRS.
S corporations must file Form 1120S with the IRS to declare their revenue.
The election must be made no later than two months and fifteen days after the start of the tax year in which the election is to take place, although it can also be made at any point during the preceding year.
A pass-through company is a S corporation. Which suggests that it is not a federally tax-paying agency; rather, it is a tax-reporting entity. However, under a certain limited circumstances (discussed later), a S company that was a C corporation prior to transitioning to S classification can be personally responsible for federal taxes. Additionally, certain states impose a minimum tax on S corporations even though the S company has no federal tax obligation.
Both profits, allowances, credits, dividends, and losses are distributed to shareholders proportionate to their equity interest in the S corporation. For instance, if owners A and B own 50% of the shares of the S company, they would declare 50% of the business's profits on their individual income tax reports.