Your business structure can have a big impact on taxes and personal liability. Though limited liability companies (LLCs) are more popular, forming an S-corporation (S-corp) is the smart move for some companies.
Tax benefits of an S-corp
One of the main reasons to choose an S-corp is to lower your tax bill. Unlike a regular corporation (C-corp), an S-corp doesn’t pay corporate income taxes. Instead, profits and losses pass through to the owners’ personal tax returns. This arrangement avoids double taxation, which happens when the government taxes income at both the corporate and personal levels.
In addition, S-corp owners who work in their businesses can save on self-employment taxes. As an owner, you must pay yourself a reasonable salary. This salary is subject to Social Security and Medicare taxes. However, profits beyond your salary are not. Over the long run, these savings can add up.
Other factors that influence whether to form an S-corp
Filing as an S-corp makes sense if your business earns consistent profits and you plan to pay yourself a salary. If your business is just starting or you are not earning much, the costs and paperwork may not be worth it.
An S-corp is a good choice for small businesses with a limited number of owners. Virginia and the District of Columbia both follow federal rules, which limit S-corp ownership to 100 shareholders who must be U.S. citizens or permanent residents. If your business has more complex ownership, such as non-resident investors, an S-corp may not be an option.
Finally, remember that S-corps require more recordkeeping than sole proprietorships or LLCs, and you’ll need to file payroll taxes and maintain accurate records. This extra work is worth it if your tax savings outweigh the costs.
Understanding your options can help you choose the right structure for your business. If you think an S-corp might work for you, review the potential tax savings and requirements. A well-informed choice can save money and support your business goals.