S Corporation Tax Attorney Houston
What is an S-Corp?:
An S-Corp is a corporation that has received the Subchapter S designation from the IRS. A business must first be chartered as a corporation in the state where it’s headquartered then file to be considered an S-Corp.
According to the IRS, S-Corporations are “considered by law to be a unique entity, separate and apart from those who own it”. This allows for a limit on the financial liability for which an owner (AKA ‘shareholder’) is responsible.
The S-Corp has the ability to have profits and losses pass through to the shareholder’s personal tax return. Therefore the business is not taxed itself, only the shareholders.
There is an important caveat: any shareholder who works for the company must pay him or herself “reasonable compensation”. Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as ‘wages.’
Pros and Cons of the S-Corp:
One of the best features of the S-Corp is the tax savings for you and your business. If you remember, the members of an LLC are subject to employment tax on the entire net income of the business. Conversely, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a ‘distribution’ which is taxed at the same rate as the rest of the shareholder’s income.
The benefits that shareholder/employees receive can be written off as business expenses.
An S-Corp also allows the business to have an independent life separate from the shareholders. If a shareholder dies, leaves the company, or sells his or her shares the S-Corp can continue doing business relatively undisturbed. Thus by maintaining the business as a distinct corporate entity, clearer lines are defined between the shareholders and the business that improve the protection of the shareholders.
These could however come with a price, as a separate structure, S-Corps require scheduled director and shareholder meetings, minutes from those meetings, adoption and updates to by-laws, stock transfers and records maintenance.
There will be a greater number of forms required by the IRS for an S Corp.
Combining the Benefits of an LLC with an S-Corp:
There is always the possibility of requesting S-Corp status for your LLC. Your tax professional can advise you on the pros and cons.
A special election has to be made with the IRS to have the LLC taxed as an S-Corp using Form 2553.
This must be filed before the first two months and fifteen days of the beginning of the tax year in which the election is to take effect. Some late elections are allowed by the IRS under special circumstances.
S Corporation Tax Attorney Houston
