Looking deeper into the workings of S Corporations, TRUiC discusses the advantages of forming an S Corp in California and how it can reduce a business’s tax burden.
Discussion on S Corps and their Advantages in California
When it comes to providing actionable tools and guides for new and existing businesses, TRUiC leaves no detail out. However, if you have thought of starting or converting your business into an S Corp, you will want to know more about what they say about its advantages.
What is an S Corp?
An S Corp is not an actual business structure but a tax status that you can choose with the IRS. As mentioned earlier, the purpose of an S Corp is to help reduce the tax burden of small businesses, giving them a better chance of survival. The pass-through taxation of the S Corp means that the business owner is paid everything in a salary and distributions taxed on their personal income tax according to their earnings bracket.
In California, you can select it after first forming a limited liability company (LLC). Then you elect to use this tax status when applying for an EIN with the IRS by filing Form 2553 of the Subchapter S. Bear in mind that California implements a 1.5% franchise tax on S Corps.
What Requirements and Restrictions Do S Corps Have
Firstly, an S Corp can only have up to 100 shareholders and must be a domestic corporation with only US citizens or permanent resident aliens as shareholders. In addition, they can only issue one type of stock, and their owners are only private individuals and some types of trusts or estates (no other business entities can own them). Finally, to remain compliant, they must keep meeting minutes.
Advantages of a California S Corp
One of the main advantages of S Corps is that they avoid double taxation (there are some exceptions in California). Instead, all the income, profits, and losses appear on S Corp owners’ personal income tax returns. However, since the owners also earn a salary, they must pay self-employment taxes.
If the business meets the requirements and earns enough to pay the owner’s, minimum distributions, and the required accounting, an S Corp could constitute a worthy tax saving salary.
When is an S Corp the Best Strategy?
Several factors form part of the considerations for choosing an S Corp. Forming an LLC already has pass-through taxation without paying yourself a salary for which you must pay employment and income taxes.
Another consideration is that there is enough profit to cover a reasonable salary that someone else would get to do the same job and distributions of at least $10,000 annually. Moreover, S Corps need the added expense of a professional accountant, which costs significantly more than the accounting for an LLC. Therefore, these ongoing expenses, including formalizing the business into an LLC, are sometimes considered disadvantages.
Process of Forming An S Corp
Opting for S Corp status offers several advantages for business owners in California, as long as they meet the requirements. Therefore, the tax savings provided by S Corps can make the difference between a business’s survival during this competitive climate, something that continues to place the US at the top of the globalized world.