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What should you know before forming an S corporation?

On Behalf of | Jan 4, 2023 | Business Law

Understanding the type of business formation you wish to use is essential to making the right choice. If you have decided that you want to form an S corporation, it can help to learn a little about the unique aspects of this choice.

The IRS states an S corporation’s main distinction is pass-through taxation.

What it is

Pass-through taxation means that instead of the business paying its own taxes, the shareholders will claim all profits and losses on their personal tax returns. There is no business rate taxation for S corporations as everything is handled at the personal rates.

Other important details

With an S corporation, it is also important to note that you have a limit of 100 shareholders. The shareholders must be individuals and United States citizens. All stock must be the same class, and certain businesses cannot form an S corporation.

The main reason to consider this type of formation is the taxation setup. It can help your business save a lot of money and reduces the paperwork you have to do. It also will make you less liable for certain aspects of the business.

Before you make your final decision about forming an S corporation, you have to ensure it is the right fit for your type of business. Keep the limitations in mind, Remember, it must be a domestic business with domestic shareholders, and you must stay within the limit on the number of shareholders. In addition, you want to be sure pass-through taxation will work for everyone who may want to invest. In the end, it could be the right choice for your business if you want to lower liability and make tax time easier.


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