An s-corporation might be right for a start-up company. Are you starting a business? The s-corporation is worth considering.
An s- corporation is a type of corporation that has all the regular rules for meeting minutes, shareholders meetings and Board of Directors meetings. Yet the difference comes in two ways, first, the s- corporation can have only 100 shareholders maximum, husband and wife are considered one shareholder. Then, there can be no non-resident aliens as shareholders.
The second difference is in how the s-corporation is taxed. It is taxed as a flow through business which means the shareholders are taxed as individuals and the corporation is not taxed. The shareholder’s income is reported on her individual income tax return. Some tax manipulation can be done with the shareholder’s income. Namely, part of the shareholder’s income can be characterized as dividend income and thus, be taxed at a lower rate.
For a start-up anticipating losses in the first years, an s-corporation can be a benefit because the losses from the s-corporation can offset the shareholder’s individual income on her individual tax return. If the business is profitable, then the shifting of income between individual income and dividends would be an advantage.
To set up an s-corporation go to IRS.gov and search for the s- corporation election form. It is best if a lawyer assists you in filling it out the form because the form is complicated.
As always this is general legal information from the legal beagle, so please consult an attorney.