Can My Company be an S Corporation?
Many of the problems small business owners encounter are related to taxation. If your business is
a sole proprietorship, then you will use your Social Security Number as your tax ID and include
their business income on your personal 1040 form. However, if you are looking to raise some
money, you may want to consider changing your business structure to a C Corp or an S Corp.
These structures will have serious implications when it comes to tax time – some good and some
bad. corporations—which involves several other layers of taxation issues.
How are S Corporations Taxed?
It is helpful to compare an S corporation to a C corporation to better understand taxation. With a
C corporation, the company will pay taxes on its profits at the corporate level and then pay
dividends to shareholders, who are then taxed at the individual level. This is called “double
taxation” and can be quite cumbersome and costly.
With an S corporation, all income is passed through to shareholders for federal tax purposes. All
losses, credits, and deductions also pass through. Shareholders then report their income and
losses on their yearly personal tax returns. They also pay individual income tax rates.
What Corporations Qualify?
According to the IRS, you can elect to become an S corporation if you meet the following:
● You have only 1 class of stock
● You have no more than 100 shareholders
● Your shareholders are individuals, estates, and certain trusts
● None of your shareholders are corporations, partnerships, or non-resident alien
● You have a domestic corporation
● You are not disqualified as ineligible because you are a financial institution, domestic
international sales corporation, or an insurance company
Typically, only small businesses will be able to qualify for S corp status, which kind of makes
sense. Many S corporations started out as sole proprietorships or one-person limited liability companies (LLCs).
How to Apply to Become an S Corp
You must complete Form 2553, Election by a Small Business Corporation, which you can find at
the IRS website. All shareholders must sign the form. You should keep a copy for your own
records before submitting it.
Should You Become an S Corp?
We cannot guarantee that you will pay less in taxes if you choose to become an S corp.
Everything depends on your individual situation. Whether you should elect to become an S corp
will depend on many factors, including:
● Your corporate income, losses, deductions, and credits
● Your personal income, including that of your spouse if you are married
● Your plans for the future of your company, including how large you want to grow
● Whether it makes sense for you to issue more than one class of stock, which would
preclude S corp status
Rather than analyze these issues on your own, contact an experienced Wilmington business
formation attorney. Hodges Coxe Potter & Phillips, LLP has served the Wilmington business
community for decades. We are here to discuss any business formation issues that you have.
Please call 910-772-1678 if you have questions to schedule an initial consultation.