Benefits of an S-Corp and Benefits of a partnership
When paying an annual business return, your corporation status or the type of business you run plays a huge role. Some business owners pay double taxes, and some can pass their income to shareholders, who then pay taxes on their share of income. In this case, the business is not taxed. An S-Corp, or S Corporation, and a Partnership enjoys such a benefit – they are both not double taxed. On the other hand, a limited liability company (LLC) and C Corporations are double taxed. The income that these businesses make is taxed both at company and shareholders’ level.
Nevertheless, this article discusses the benefits of an S-Corp and Partnerships.
What is an S-Corp?
The type of corporation of any business is legally determined at registration with your state. But, you ought to pay attention to this: States do not determine the S-Corp status of an organization. As such, you must first register your business as an LLC or C corporation with your state. When all is done, and you have your business corporation status, file Form 2553 with the IRS to apply for S corporation taxation status. Why is this so? Well, S corporation status is an IRS tax status that may offer income tax advantages to small businesses. It is solely determined by the IRS, not your state where you register the business.
Nevertheless, an S-Corp is an incorporated business with 100 shareholders or less that elects to be taxed as a partnership. Here, corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations.
What are the benefits of an S-Corp?
Shareholders of a small business that applies for an S-Corp status do so to enjoy tax benefits. And these benefits are listed below:
- An S-Corp does not pay Federal taxes at entity level, but shareholders are taxed on their share of income from the business
- Shareholders can be company employees, but they pay much less self-employment taxes than LLC owners
- S-Corp shareholders enjoy the same liability protection as an LLC
- S-Corps pay shareholders, cum employees, salary and the payroll taxes on it. This may save them money on taxes because, just like an LLC, they would pay self-employment taxes on the business’s gross income.
- Additional earnings in an S-Corp are distributed to shareholders as dividends. This may also save money because dividends are taxed at a much lower rate than income.
- S-Corps enjoy a once-a-year tax filing requirement compared to C-corps, which must file quarterly.
What is a Partnership?
A partnership is merely an agreement between two or more people to run and manage a business and share losses and profits. The arrangement may be written or just verbal. There are many types of partnerships that people can choose to get into. Some have equal shares of liabilities, income, and loss. But some will have shareholders with a limited liability. Nevertheless, partnerships have a slight difference to S-Corps, but they are largely similar in the way they are taxed.
What are the tax advantages of a partnership?
- A partnership is also viewed as a pass-through entity. It is not taxed at corporate level
- Partnerships enjoy tax-free property transfers
- Partners can deduct losses from the business on their own individual tax return
Conclusion
Obtaining the S-Corp status for a small business comes with tax benefits, so do partnerships. However, even though both are pass-through entities favored with several tax benefits, general partners’ share of income in a Partnership is subject to self-employment taxes.
People also ask the following
1. What Is an S Corporation (S Corp)?
It is a tax-filing status that either a C-Corp or LLC elects for tax paying purposes. This status is obtained by filing Form 2553 with the IRS to apply for S corporation taxation status.
2. How to Start and Form an S Corp
An S-Corp, also known as an S Chapter, is a tax filing status obtained from the IRS. If you want it, first register your small business as a C-Corp or an LLC. Once done, you can file Form 2553 with the IRS within 75 days of your corporation formation. If they are OK with your application, you will obtain the S-Corp status.
3. What is the difference between an LLC and S-Corp?
An LLC and S-Corp both give shareholders limited liability, meaning that their assets are protected against any business losses and liabilities. However, an S-Corp is taxed differently. It is called a pass-through entity in the sense that business income is not taxed at business level, but it is passed through to shareholders, who then report it when filing their personal tax returns.
4. What is the organizational structure of an S-Corp?
S-Corps are first registered as either an LLC or C-Corp before being allocated the S-Corp status for tax purposes. Therefore, the IRS recognizes them as “partnerships” for tax purposes. Shareholders (partners) in an S-Corp are employed by the business and pay themselves ‘reasonable’ salaries, in line with IRS standards.
5. What is the cost of setting up an S-Corp?
Obtaining an S-Corp status is a multi-stage process that begins at your state level. And, you must first register your business as either a C-Corp or an LLC before applying for an S-Corp status with the IRS. State fees to register a business are different across different states. So, visiting your state website to obtain these filing fees will give you the answer you are looking for. Just a heads-up, some states may have a set flat fee, but some may actually have a flexible fee that is determined by the number of authorized shares. If you are to apply using lawyers, be prepared to pay more.
