Our Las Vegas business CPAs are often asked how the various types of business structures work. Each type of entity comes with its own legal, tax, and personal obligations. There are a lot of factors that go into deciding which option is best for your own unique business, as there really is no one-size-fits-all solution.
Here, we’ll explore the details of an S corp. Remember, the internet can’t give you all of the information you need; each situation is different. It’s always best to speak with a business CPA before you’re faced with fines and penalties.
What is an S Corp?
An S corp is a business entity that holds a Subchapter S designation with the IRS. In simple terms, this means you can pass your profits and losses through to your personal tax return, rather than claiming them as though you’re a corporation (which would make you a C corp.)
This means your business itself isn’t taxed; rather, the taxation is the responsibility of the shareholders or “employees.” In an S corp, you are required to pay yourself “reasonable compensation”, even if you are the sole shareholder. Reasonable compensation basically means you have to claim a fair market value as your own individual income.
As long as you take a reasonable compensation, the remainder of your profits can be claimed as dividends, which can be advantageous in a tax setting. Be advised, however, that incredibly high dividends, combined with a low salary, can be a red flag for the IRS, and a miscalculation can lead to hefty fines and penalties.
S Corp Specifics
Legal structures for business entities are quite complicated. The following is a generalized list of requirements to form an S corp:
- Domesticity. Generally speaking, your business must be domestic and meet eligibility guidelines.
- Shareholder Limitations. You may not have more than 100 shareholders, and you can only issue one class of stock. Additionally, you must include shareholders who may be individuals, which means certain affiliations are not permitted.
Advantages of an S Corp
As with any legal structure, there are certain benefits of an S corp, including the following:
- Limited Liability. S corp owners’ personal and business assets are separate, which means the former has greater protection against lawsuits.
- Elimination of Double Taxation. While a business CPA is your best defense against improper filing, S corps are fundamentally structured such that shareholders aren’t taxed on both corporate and personal taxes for the same income.
- Favorable Treatment of Losses. Losses are passed through to shareholders on a pro-rata basis, meaning S corp owners can claim losses on their personal tax returns in many cases.
Let Our Las Vegas Business CPAs Structure You For Success
S corps are just one of the many legal structures available to businesses. There are many questions you must answer to choose the right setup for your business, and the answers aren’t always as obvious as they may seem like they should be. Reach out to the pros at our Las Vegas business CPA firm today or call 702-870-7999.