Experienced Pleasanton business formation attorney James G. Schwartz can help you decide if an S Corporation is an appropriate structure for your business. Most business owners choose a corporate business structure in order to (1) shield themselves from personal liability or at least limit it and (2) limit the taxation on their business profits. There are some benefits to organizing as an S Corporation for small and medium-sized businesses. An S Corporation is a corporation that elects to be taxed under Subchapter S of federal law. An S Corporation does not pay federal income tax, but shareholders pay taxes on the pass-through as they would in a sole proprietorship, LLC, partnership.
If you decide to create a corporation, you must first file the necessary paperwork with the Secretary of State, and you can next elect an S structure by filing a Form 2553 with the IRS. After that, you must submit a statement of information, a federal tax identification number, an S corporation election, a California business license, and California corporate records. An S corporation is allowed tax credits and net operating losses.What Is An S Corporation?
An S Corporation is a structure that can allow an owner to enjoy the limited liability benefit of incorporation, but pay income taxes like a sole proprietor. Liability of the owners for the business' debts depends on how the owner chooses to organize under state law—as an LLC, corporation, or partnership. If an owner chooses to organize as a corporation under California law, the shareholders will not be liable for business losses and creditors will only be able to look to the corporation and business assets for payment.
Operating as an S Corporation has several benefits. Each shareholder of an S Corporation must pay taxes on his or her pro rata share of an S Corporation's items of income, deductions, and credits. Because an owner can pass business losses to his or her personal income tax, he or she can use the losses to offset any income from other sources. If an owner sells an S Corporation, his or her taxable gain in selling the business can be less than it would be if he or she were organized in another corporate structure.
Although they need to pay taxes on corporate income, shareholders of an S Corporation can choose their state business structure limit or eliminate personal liability for business losses, so that creditors may only look to the corporation and its business assets for payment.
S Corporations may have an easier time attracting particularly good employees due to stock options and fringe benefits and may find it easier to raise capital due to the stock options. They tend to be audited less frequently than sole proprietorships.What Are the Requirements of an S Corporation in Pleasanton?
In exchange for the benefits, S Corporations must follow strict requirements. For example, every shareholder must be a U.S. citizen or resident and there can be no more than 100 shareholders. The profits and losses must be allocated in proportion to every shareholder's interest in the business. Corporate losses may that are greater than a shareholder's 'basis' in corporate stock—roughly the amount of the shareholder's investment—may not be deducted. S Corporations cannot deduct fringe benefits that are given to worker-shareholders who own more than two percent of the corporation.
Under California law, the annual tax for S corporations is the greater of 1.5% of the net income or $800, but as of January 1, 2000, a newly incorporated or qualified corporation is exempt from this requirement for the first year of business. The management structure and life of an S Corporation depends on the type of entity it is under state law (corporation, partnership or LLC).Consult An Experienced Alameda County S Corporation Lawyer
If you choose the S Corporation structure at the start of your business, and later find that another structure would be more profitable, you can change your status. LLCs, for example, are sometimes a better choice, and an experienced business attorney can help you convert from one structure to another.
With over 30 years of experience handling business formations, Mr. Schwartz can advise business clients on what corporate structure will best serve their goals. S Corporations and other business structures must be properly created and maintained to provide the best possible protection. Contact experienced Pleasanton business law attorney James G. Schwartz at 925-463-1073 or via our contact form. We serve businesses in Oakland, Newark and elsewhere in Alameda County and the East Bay.