Whether you are starting a new business venture, or thinking about making changes to an existing one, it makes sense to consider the benefits an S corporation has to offer. Although it may be at first difficult to understand the difference between an S and C corporation, one arrangement may be far better for your company.
If you are curious about S corporations but don’t know where to start, consider calling a Minnesota S corporation lawyer. A business formation attorney could explain the benefits and detriments of forming an S corporation, guide you through the formation process, and help you comply with the ongoing legal requirements of an S corporation.
An S corporation is a corporation within the federal tax code with slightly different rules. Unlike a C corporation, an S corporation is any business that chooses to pass corporate income, losses, and other tax credit to shareholders for federal tax purposes. The benefits of this structure are straightforward.
Sole proprietorships and partnerships do not limit liability. If a sole proprietor or member in a partnership incurs liability, the personal assets of that sole proprietor or both partners may be seized to satisfy the liability. On the other hand, both C and S corporations limit liability to the contribution of shareholders. For example, if a shareholder invested $500 in a corporation, the most money the shareholder can lose if the corporation is sued is their original investment of $500. The ability to limit liability for shareholders is an extremely attractive feature that may make the business an even better investment.
While both C corporations and S corporations enjoy limited liability, only the S corporation has pass-through taxation. Simply put, corporate income, losses, credits, and deductions are “passed through” from the corporation to the shareholder for tax purposes. Shareholders report the same information on their personal income returns, which are taxed according to personal income tax rates. In this way, an S corporation avoids the corporate tax rate of a C corporation as well as the second layer of taxation on distributions from C corporation to shareholders. S corporations then avoid double taxation while maintaining the protections of limited liability.
Because there are obvious benefits to an S corporation, the requirements to form one can be tricky. According to the tax code, an S corporation must meet the following requirements to qualify for S corporation status:
Because an S corporation is still a corporation, it must also comply with the regular features of a corporation. Meaning, Articles of Incorporation must be filed with the secretary of state, a board of directors must be appointed, meetings must be scheduled, and other legal protocols unique to the corporate structure. Continuing to comply with these corporate requirements is just as, if not more, important than meeting the formation burdens. Failing to do so could result in a loss of limited liability status.
If you have lots of experience as an entrepreneur or are just starting out, a Minnesota S corporation lawyer could be a valuable resource when considering your options for your business. Whether you need help deciding what to do, are ready to form an S corporation, or need help to comply with ongoing legal burdens, a Bloomington S corporation attorney could help you however your business requires. Get started today by making an appointment.