Texas Legal Entities
Electing S Corporation Status
Choosing to operate as an S corporation can be very beneficial. The formation of an S corporation allows business losses to offset income from other sources on your personal income tax return. When you sell an S corporation, the taxable gain on the sale has the potential to be less than if it was a regular corporation. S corporation shareholders are exempt from self-employment taxes, as opposed to LLC owners, who are not. Self-employment taxes typically account for greater than 15% of your income and pay Social Security and Medicare taxes.
However, S corporations have strict guidelines. Every shareholder must be a United States resident or citizen. The shareholders must not exceed 100 in number. The profits and losses of an S corporation are to be allocated in proportion with the shareholder’s interest in the business. An S corporation shareholder is not permitted to deduct corporate losses that exceed his basis in corporate stock. In addition, corporations are prohibited from deducting the cost of fringe benefits when they are provided to employee-shareholders who own more than 2% of the corporation.
The decision to be an S corporation is not permanent. If it later becomes profitable to file as a regular corporation, the S corporation status can be dropped. However, there is a time limitation.
To create an S corporation, proper documentation must be filed with the secretary of state’s office of the state’s corporations division. All shareholders must then sign and file IRS Form 2553 to elect to be regarded as an S corporation.
If you would like more information regarding an S corporation, contact Texas Legal Entities at 512-472-2431 today.
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