How to form an S-corporation for Credit provider

Introduction

An S corporation can have only one class of stock and cannot be owned by more than 100 shareholders at once. Many states also require an S corporation to pay corporate income tax or franchise tax, as well as taxes on certain receipts, including gross income from intangible property and interest income not connected with a regular business.

An S corporation must meet specific test requirements regarding shareholder-employees’ wages and ownership percentage before it can qualify for this status. Also, there are limitations on who can own shares of stock in an S corporation.

An S corporation is a type of business entity in the United States

It is a corporation that has made an election to be treated as a pass-through entity for federal income tax purposes. This means that the corporation itself does not pay federal taxes; instead, it passes its profits and losses through to its shareholders, who report them on their personal tax returns and are responsible for paying any resulting taxes due.

The law designed the S corporation to avoid double taxation

To understand how an S-corporation works, you must first understand what double taxation is. Double taxation occurs when an entity takes income from one source and pays taxes on that income, then the entity takes another source of income and pays taxes on it again.

When a corporation makes money and pays taxes on its profits, it can still be taxed again as personal income by shareholders who receive dividends or sell their stock in the company. By contrast, S corporations avoid double taxation because they are pass-through entities (and thus not subject to corporate level tax). Instead of paying corporate level tax, they pay personal level tax on their net business profit at their respective individual tax rates.

An S corporation can have only one class of stock

Unlike C corporations, which can issue both common and preferred stock, an S corporation must issue only the same type of shares. Shareholders of an S corporation will receive the same profits and losses as all other shareholders in proportion to their ownership.

Many states also require an S corporation to pay corporate income tax or franchise tax

The state-level taxes for S corporations are different from federal taxes. Some states have no corporate income tax, but may have other types of taxes such as sales and use taxes. For example, California does not tax S corporations on any portion of their income, but it does require them to register with the state and pay an annual fee of $800 per year.

The amount of paperwork required depends on where you operate your business. However, in general you must file an annual information return that includes your financial data and balance sheet information with both federal and state governments annually or quarterly depending on which schedule is required by each government entity.

The company must have only allowable shareholders

The main reason for this requirement is to avoid what’s called “disguised employee compensation income.” If the business pays a shareholder-employee of the corporation more than $50,000 in wages, it could be considered as disguised compensation to that person.

In order to avoid this situation, there are two tests that must be met:

• A shareholder-employee’s total compensation cannot exceed $100,000 during any tax year (pre-tax pay).
• The corporation must not have more than 100 shareholders at any time during the year.

The company must meet specific test requirements regarding shareholder-employees’ wages and ownership percentage of employees

This is because an S corporation generally can’t have more than 100 shareholders, including all classes of stock.

Your corporation will pass this test if you:

• Pay at least $600 in wages during the tax year to each shareholder-employee who has an ownership interest in the business. The $600 amount is reduced by any amount that you could have but don’t pay as salary or wages. For example, if a shareholder-employee receives only half of his or her normal salary due to being laid off for three months during the year, then only 50 percent of his or her normal wage would be considered earned by that individual when calculating whether he or she was paid at least $600 in wages for that year.* Own more than 10% of its stock.* Your corporation may own up to 20% interest in another business (up from 15% prior law)

The company must file Form 2553 \u2014 with IRS

To form an S-corporation, Form 2553 \u2014 Election by a Small Business Corporation must be filed with the Internal Revenue Service (IRS) within two months and 15 days after the beginning date of the tax year for which the election will be effective.

The idea behind an S corporation is to achieve pass-through taxation

An S corporation generally is a corporation that has made an election to be treated as an S corporation. This means that the entity is a separate taxpaying entity, but its shareholders are not subject to tax on their share of the income earned by the corporation. Instead, they report their proportionate share of income or loss on their personal tax returns and pay taxes at their own individual tax rates.

Conclusion

The S corporation is a great way to protect your personal assets and earn additional income as a business owner. If you’re interested in starting an S corporation, contact us today. We’ll help you get started on this exciting journey!