Instead, the net income of an S corporation is passed through to its shareholders and each shareholder pays income tax on the company’s earnings based on his individual income tax rate and the percentage of the company he owns. Formation and ongoing expenses. Payments to employees and shareholders could be distributed as either salaries or dividends. Page Last Reviewed or Updated: 09-Nov-2020, Request for Taxpayer Identification Number (TIN) and Certification, Employers engaged in a trade or business who pay compensation, About Form 1120-S, U.S. Income Tax Return for an S Corporation, S Corporation Compensation and Medical Insurance Issues, S Corporation Employees, Shareholders and Corporate Officers, Where to File Tax Returns - Addresses Listed by Return Type, E-file for Business and Self Employed Taxpayers, About Publication 583, Starting a Business and Keeping Records, Electronic Federal Tax Payment System (EFTPS), Form 2553 Election by a Small Business Corporation, Instructions for Form 941 Employers QUARTERLY Federal Tax Return, Instructions for Form 943 Employers Annual Federal Tax Return for Agricultural Employees, Instructions for Form 940 Employers Annual Federal Unemployment (FUTA) Tax Return, Instructions for Schedule E (Form 1040 and 1040-SR) Supplemental Income and Loss, Treasury Inspector General for Tax Administration, May be individuals, certain trusts, and estates and, May not be partnerships, corporations or non-resident alien shareholders. S corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations (501(c)(3)). Versus c corps, which must file quarterly. An S corporation is often recommended when small business owners seek advice regarding how to structure their business. The "corporate veil" can also be lost if a corporation is terminated by a state for failure to file required forms or pay required fees and taxes. CSC is a service company and does not offer legal or financial advice. The business continues to exist even if the owner leaves or dies. You may be able to file many of these S Corp documents online. Tax qualification obligations. State laws require all corporations to maintain a registered address with the Secretary of State in each state where they do business. Not be an ineligible corporation (i.e. For this reason, a c corp makes very little sense for a small business. However, the charges are typically inexpensive and may be deducted as a cost of doing business. Our guide can provide some answers to help you decide. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Among the subchapter s corp requirements you must weigh when considering this particular status is that s corps must file articles of incorporation, keep a record of corporate minutes, hold shareholder and director meetings, as well as allow their shareholders to weigh in with a vote concerning company decisions. Form 1120S: U.S. Income Tax Return for an S Corporation is used to report the income, losses, and dividends of S corporation shareholders. But if you opt for an s corp, make sure you have a solid accountant as one mistake in filing can send your company back to c corp status, leaving it open to be taxed twice. The company can attract investors through the sale of shares of stock. If you are still undecided as to the pros and cons of declaring your business an s corp, please contact to speak to someone who may be able to set you on the right path. Characterizing distributions as salary or dividends may help the owner reduce liability for self-employment tax while generating business-expense and wages-paid deductions. An S Corporation is a special type of corporation created through the IRS. State laws require s corps to hold annual meetings of shareholders and directors and record meeting minutes. Choose a legal name and reserve it, if the Secretary of State in your state does that sort of thing (not all do). Company directors, officers, shareholders, and employees enjoy limited liability protection. Normally, we submit documents directly to the state. Read on if this sounds enticing for your business. An S corporation, also known as an S subchapter, refers to a type of corporation. Our incorporation specialists have the answer. Specific financial institutions, insurance companies, and domestic international sales companies are also ineligible. Tax-Efficient Investing: A Beginner's Guide, Understanding S Corporations (S Subchapter), Disadvantages of Filing Under Subchapter S, How to Use Form 1120S: U.S. Income Tax Return for an S Corporation, 1099-CAP Form—Understanding Your 1099-CAP Form. The corporation may pass income directly to shareholders and avoid double taxation. Income is not taxed twice – once as corporate income and again as dividend income. Partnerships, corporations, and nonresident aliens do not qualify as shareholders. File Form SS-4 or apply online at the Internal Revenue Service website to obtain an Employer Identification Number (EIN).