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What are the advantages of forming an S corporation?

On Behalf of | Mar 2, 2018 | Business Transactions And Litigation |

For Vietnamese business owners in California’s Little Saigon/Westminster area and beyond, setting up or restructuring your company as an S corporation has some advantages to consider. This business form limits the number of shareholders and offers some appealing tax benefits as well. Here is a brief look at some of the pros and cons of forming an S corporation.

According to the state Franchise Tax Board, an S corporation does not have to pay any federal income tax. It does have to pay a 1.5-percent tax on its net income, however, to the state of California. Like a partnership, this structure allows income, credits and deductions to flow from the corporation to its shareholders. The shareholders, in turn, claim the income or losses on their personal income tax, where it is then taxed at the shareholder level instead of the corporate level.

This flow-through revenue method keeps the S corporation’s profits from a double-tax that other types of corporations must pay, along with a third tax when it is claimed as income by shareholders. S corporations are not able to deduct business expenses, however. Other features of an S corporation include:

  • Limited to 100 shareholders who must be U.S. citizens or residents
  • Shareholders must be individual people, not other corporations or partnerships
  • There is only one class of stock

Exceptions are made for shareholder groups such as certain trusts, tax-exempt corporations and estates. To become an S corporation, the entity itself must make that election. The deadline for filing or converting to an S corporation is the 15 of the third month following the end of a taxable year.

Taxes are not everybody’s idea of fun, so it is understandable if you wish to leave that to the accountants. If you are considering forming an S corporation, seek advice from an experienced tax attorney who can guide you through the process.

This information about S corporations is for information only. You should not consider it legal advice.

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