The attractive tax benefits of an S corp are usually the main reason why entrepreneurs choose this path. Technically, an S corp is a tax election, and a popular one at that, for reasons a simple comparison between the taxation of an S corp and other types of business can illustrate. But before you ask how to create an S corp in California, read on to find out why you should choose to have your small business taxed as an S corp.
What is S corporation status?
In terms of taxes, there are several designations:
- Sole proprietorship
- C corporation
- S corporation
What does it take for a business to be designated as an S corp?
Not every business qualifies to become an S corp. Below is a list of the essential requirements for a business to be designated as an S corporation:
- Register the business as a corporation
- Shareholders must sign IRS 2553 form
- Maximum number of shareholders is 100
- All shareholders must be US citizens/permanent residents
- All shareholders must be individuals with the exemption of estates, trusts and tax-exempt organizations
- A single class of stock is allowed
When should I create an S Corp?
From a technical point of view, you can elect S corp status as long as your business meets the above requirements. You can then submit Form 2553: Election by a Small Business Corporation with the IRS. There is also a requirement concerning the deadline: you need to file Form 2553 2 months and 15 days after the tax year begins at the latest.
Before the deadline starts to approach, consider any relevant factors and consult a tax specialist to decide whether establishing an S corp is your best course of action.
But you should choose the timing wisely so you can get the most out of the S corp status from a financial point of view. Namely, when filing under S chapter, you receive tax benefits on dividends alone. For this reason, it is financially justifiable to postpone the S election until it will really pay off to have the S corp tax designation. And that will happen when your business starts to generate more income.
What are the advantages of an S corporation?
The benefits of filing taxes under S chapter are the following:
- Pass-through taxation
- Simple conversion to C corp
- Protection against liability for shareholders
With an S corp, you can avoid double taxation because the company designated as an S corp is not required to pay taxes on profits any longer.
As far as the disadvantages of an S corp go, some limitations and restrictions do apply. For instance, the IRS demands the active owners of an S corp to pay themselves wages. The wages are taxed as regular payroll wages.
We are here for you for all your business needs
Now that you know what the benefits of an S corp are for your small business, you might be wondering how to create an S corp in California. The answer is simple and straightforward: call David York’s Tax Service of San Diego! We will go above and beyond to make the process smooth, fast and as convenient as possible.