S Corps - Incorporation Advantages and Considerations

Once it has been decided that a person, or group of people, are going to open a business, a decision needs to be made on which type of corporation to choose. Most people do not realize that there are a few different types of corporations to choose from.

If no election is made, then it is assumed that you are going to be a C-corp. However, this is not always the best choice and many times choosing an S-corp is better. This type of company has many tax advantages, but one downside is that there can only be 100 shareholders. Please note though that in a family owned business the entire family could be considered just one shareholder for this purpose.

An S-corporation is basically considered a pass through entity. This means that instead of the double taxation that most corporations have, the S-corp is only taxed at the individual level. Normally, the profits and losses are split based on the agreement in the articles of incorporation. While there are some benefits, there are some different reporting requirements in regards to the company's qualifications. Setting up an S-corporation can be tricky so it is often best to at least consult with a qualified CPA before incorporating. There are, however, some things that you can do to get the ball rolling.

Before visiting a professional be sure to get all your documents related to the business in order and readily available. This can reduce the amount of time with the CPA and therefore save you some money. Do not be afraid to ask them what you can do to make the process go easier and faster. Most good CPA's will be glad to help you in any way possible.

As we discussed above, there are many benefits in the reduced taxation associated with this type of corporation. The key to getting ready for tax time is to make sure that the agreement on how profits and losses will be treated is clear. The reason for this is these will pass to the individual tax returns and will be taxed at each respective personal tax rate. For this reason, if the proper assignments are not made, many returns could be affected.

Also, it is important to be familiar with an S-corp's qualifications. Setting up the company requires some more paperwork and could be very complex in certain situations. The reporting requirements can also be more cumbersome. Tax forms 1120S and the K-1 are quite different than what most are used to. While some people could complete all this on their own, it is not advised and many will actually save more money in the long run by seeking the help of a professional. Tax laws are often changing so it is normally best to let the professionals keep track of it all.

Things such as liabilities, insurance claims, and other issues are huge to a business and it is best to have all things reviewed, at least occasionally, by a new set of eyes. Even the most careful people in the world miss something from time to time when they are looking at it each and every day.