Recently, I’ve been answering questions about the S-Corp designation. So let’s go into it!
There are several entity types available when you start a new business. Each has it’s own benefits and drawbacks.
An S Corp is a flow-through entity. In other words, at tax time, the income and tax liability “flow through” to the owners. In the case of a corporation, the owners are the shareholders – even if one person holds 100% of the shares. It is not a taxable entity by itself, as a C-Corp is.
As opposed to an LLC, sole proprietorship, or partnership, owners of S-corps are generally not subject to self employment taxes, or at least have them reduced. Owners of S-Corps are considered shareholders and employees, so their W-2 salary has payroll taxes taken already, and if you take distributions, it is subject to ordinary income taxes.
This is why this is such a desirable entity to use.
However, with all good things, there are some drawbacks.
Where C-Corporations can have an unlimited number of shareholders and types of shares, an S-Corp can have only 100 shareholders and can only issue common stock. Preferred stock is permitted only to C-Corps.
Stockholders in S-Corps MUST be US Citizens or legal residents, and the corporation must be a domestic US corporation. Corporations organized outside the US are not eligible for S-Corp designation. Non-US residents and non-US citizens may not own stock in an S-Corp. If an S-Corp issues stock to a non-US person, then they may automatically be re-classified as a C-Corp by the IRS.
Donna Harris holds a BSci in Accounting and is the owner of Bookkeeping Made Simple.
Donna Harris, BSci Accounting, MBA, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her master's in Accounting.