If you are trying to figure out what kind of entity to form for your new business, it can be difficult to determine the best one for your needs. However, while several options may work, one of the better choices is to form an S-Corporation. There are quite a few advantages to creating this kind of company, and it can be much better than an LLC or partnership.
To help you get a better understanding of how it all works, let’s break down the S-Corp information and see what it’s all about.
When filing for a business, you will notice that your options are a sole proprietorship, partnership, LLC, or corporation. However, with the last choice, you can pick between a C or an S.
So, what is S-Corporation or S-Corp?
A corporation (called a C-corp) is a legal entity that separate its assets from the owners’. You can consider S-Corp as the “lite” version of C-Corp.
One distinctive difference is in term of tax filing. Unlike C-Corp, S-Corp only need to file taxes annually. What’s more, S-Corp isn’t subject to double taxation. Even better, S-Corp is a “pass through” entity, which means that profits and losses are tied directly to the finances of the shareholders.
Other than those, it still has all of the same protections and advantages of a regular corporation.
What is “Pass Through?”
If you create a standard C-Corporation, then you are taxed twice. First, taxes are taken out at the corporate level, then again on income that passes down to shareholders. So, essentially, your salary is taxed as an agent of the company, and then any dividends or profits are also taxed when they are paid out.
Pass-through means that your salary is tied directly to the financial health of the company, so if you are making profits, then you are only taxed one time when you get paid. Conversely, however, you are also hit with any losses, so there is also that to consider. However, when first starting a company, it can be beneficial to claim such losses as it can give you more leeway in your personal taxes.
Besides the pass-through designation, S-Corps have the same advantages of a C class company. Your finances are not tied directly to the enterprise, you can structure it how you like, and it’s easy to change ownership.
Overall, as a new business, starting an S-Corporation can be a better option than finding out how to start an LLC or partnership. It’s much more stable and can give you better options on how to run your business.
For more explanation on S-Corporation, these resources can help you out: