If you're incorporating your small business you may have heard that you should incorporate as an "S-Corporation." Whether this is true or not depends on your situation and what you expect from your business.

An S-Corporation is a corporation that has made an election under subchapter S of the Internal Revenue Code that allows for special tax treatment. There are several requirements that must be met in order for a corporation to make an election to be an S-Corporation. There are limits on the number of shareholders and who can be shareholders. All shareholders must consent to the election of S-Corporation status as well. There are additional requirements and limitations, so if S-Corporation status seems like it might be right for your corporation, check with an attorney who practices business law to see if your corporation qualifies.

In a C-Corporation, the corporation pays income tax on profits of the corporation. If the corporation pays a dividend to the shareholders, this money is taxed again as income to the shareholders. This is the main disadvantage to a regular C-Corporation. It may not be as bad as it sounds, though. If you are working for your corporation you should be paid a salary. This salary is deducted from the income of the corporation before taxes, so it will only be taxed once. Depending on the business, salaries may use up most or all of the profit. As long as the salary is not unreasonably high, the IRS should not challenge it. Fringe benefits for employees such as health insurance may also be deducted by a C-Corporation, but not by an S-Corporation. For a profitable and growing company it may be better to be a C-Corporation. In a C-Corporation profits beyond salaries and other deductible expenses can be used by the company for growth rather than being distributed to the shareholders and creating taxable income for them.

An S-Corporation does not have the double level of taxation, corporate and individual, that a C-Corporation has. Instead, profits and losses are distributed among shareholders who report that income or loss on their own federal income taxes. This is the main advantage to electing S-Corporation status. It

can be particularly advantageous if the shareholders are in a relatively low tax bracket. Or if the business is likely to show a loss at first, the shareholders can use the loss to offset income from other sources. However, if the business is profitable and you want to reinvest the profits, you will pay taxes as the profits are earned in an S-Corporation, rather than when you actually receive the money. This creates an extra tax burden when the profit is earned.

Find A Lawyer
Finding a lawyer couldn't be easier! To locate a lawyer in your area choose your state, then your city and then choose a type of law relevant to your situation.

Select Your State: Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware DC Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Puerto Rico