Choosing the right legal structure is a critical decision for small business owners, as it impacts taxes, liability, and growth potential. Opting for S-corporation status can offer substantial advantages.
San Antonio S-corporation lawyer Sasha Begum has been representing small businesses like yours for years. Contact her and the team of corporation formation attorneys at Begum Paláez-Prada PLLC for help in all aspects of forming and managing an S-corporation.
An S-corporation is a tax status the Internal Revenue Service (IRS) bestows on corporations and limited liability companies (LLCs) that meet specific requirements. An S-corp must be a domestic entity, have only one class of stock, and no more than 100 shareholders. The shareholders can be individuals, estates, and some trusts but cannot be corporations, partnerships, or non-resident aliens.
Certain types of businesses cannot be classified as S-corporations, including banks, insurance companies, and international sales organizations. They are also not advantageous for every business. For instance, a business that expects significant growth could not make a public stock offering or even expand its shareholders beyond the 100-shareholder limit. Additionally, an S-corp cannot sell shares to foreign buyers or investors. A skilled attorney at Begum Paláez-Prada, PLLC could evaluate whether your specific business is eligible for S-corporation status and if it is the right decision for you.
Sole proprietors and corporations typically pay tax on their business profits. The owners of these companies are usually shareholders, and they must pay individual taxes on their income and profits from the shares. An S-corporation does not pay federal tax on its corporate profits to avoid double taxation. Instead, the profits and losses are allocated among the shareholders who pay federal income taxes at their individual rates.
S-corporations are typically small businesses, and the owners are often also employees. The rules allow an owner to draw a salary and receive a shareholder distribution of the profits. The share distributions are not subject to self-employment tax, which could be a significant advantage to some business owners. Our knowledgeable San Antonio lawyers could discuss your specific case and explain how obtaining S-corporation status might impact tax liabilities.
An S-corporation provides more protection from liability than a partnership or sole proprietorship. It is a separate legal entity, and its creditors cannot attach an owner’s personal assets to satisfy a business liability.
A business can obtain S-corporation status by filing Form 2553—Election by a Small Business Corporation. Sasha Begum and her San Antonio team could assist your business in preparing an S-corp application.
Regulatory compliance may be more complex when the business is an S-corporation than if it were a C-corporation or LLC. Shareholders who work for the business must receive a fair market-value salary. Profits and losses must be allocated to shareholders according to the number of shares they own. The corporation cannot take a tax deduction for health insurance or any other benefits paid to an employee who owns more than two percent of the company.
Because S-corporations offer significant potential tax benefits, the IRS is often highly scrutinizing. Responding to audit requests can be disruptive and expensive, so a business owner should factor in the increased likelihood of audits when deciding whether to seek S-corp status.
Many small businesses derive substantial benefits from organizing as S-corporations, but it is not right for every business. The experienced attorneys at Begum Paláez-Prada, PLLC, could help you weigh the advantages and disadvantages.
A San Antonio S-corporation lawyer from our firm could guide you through the process, from the application to regulatory compliance. Reach out today to get started.
