| There are several decisions to consider when forming | | | | pass through as a non-qualified dividend. While taxed |
| a business entity; it is important to be familiar with the | | | | at the personal income tax rate of the shareholder, the |
| tax ramifications of a given business entity before it is | | | | $65,000.00 is exempt from the self-employment / |
| filed with the designated state agency. Forming an | | | | payroll taxes. |
| S-Corporation is one of several options when deciding | | | | Companies doing business as an LLC have the same |
| which type of business entity to form; other options | | | | advantage of pass through taxation; however a single |
| include the LLC and C-Corporation. There are several | | | | member LLC is treated as a disregarded entity by the |
| practical and legal concerns to take under | | | | IRS. The business entity is disregarded as a separate |
| consideration as you determine how to structure your | | | | entity from its owner for Federal tax purposes; |
| business. You must establish whether or not your | | | | essentially what this means is that the IRS classifies |
| company will go public, you also need to consider the | | | | the single member LLC as a sole proprietorship and |
| number of partners or shareholders within the | | | | since all income from a sole proprietorship is treated as |
| company, and, perhaps most importantly, explore all | | | | earned income the full $90,000.00 would be subject to |
| the tax ramifications of each business entity. With all | | | | the 15.3% payroll / self employment tax. For this |
| these considerations in mind, there are some distinct | | | | reason, an S-Corporation could be viewed as a |
| advantages to choosing the S-Corporation as your | | | | superior entity choice for the individual owner who is |
| business entity. | | | | looking to minimize his or her payroll and |
| One advantage of the S-Corporation is that like the | | | | self-employment tax exposure. |
| LLC it receives pass through taxation. Pass through | | | | A multimember LLC is treated by the IRS as a |
| taxation simply means that federal income tax is not | | | | Partnership as the default status for federal tax |
| assessed at the entity level; profits are distributed in | | | | purposes. This requires that the LLC file the Form 1065 |
| the form of dividends and flow through to the individual | | | | Partnership return (informational only – the LLC |
| tax returns of the shareholders, and the IRS taxes the | | | | does not pay federal taxes), and the net income (or |
| shareholders at their individual income tax rate and not | | | | loss) passes through and is accounted for on the tax |
| at the entity or corporation level. Therefore the | | | | returns of each individual member. |
| S-Corporation, unlike the C-Corporation, is not subject | | | | Companies doing business as S-Corporation must first |
| to double taxation. Since net losses are “passed | | | | form a standard corporation with the state (and the |
| through” as well, the individual shareholder may be | | | | default federal tax status at that point is that of a |
| able to reduce his or her tax liability by offsetting other | | | | C-Corporation). After the corporation is formed with |
| income with any S-Corporation losses. One of the | | | | the state the company must file an IRS Small Business |
| most enticing advantages of the S-Corporation is its | | | | Tax Election form 2553 stating their intention to be |
| ability to minimize payroll / self employment taxes | | | | taxed as an S-Corporation. IncFile prepares the Form |
| which can be a significant amount of money, currently | | | | 2553 and returns it to you for your signature along |
| the rate is set at 15.3%. For example let’s take an | | | | with your filed corporation, and after the initial |
| S-Corporation with a single shareholder, if the | | | | shareholders have signed it can simply be faxed or |
| company was to have a net profit of $90,000.00 and | | | | mailed in to the IRS. The IRS Form 2553 must be |
| the shareholder employee assigned himself a salary of | | | | signed and submitted to the IRS within 75 days of the |
| $25,000.00 he would be able to reduce payroll / self | | | | date of formation of the corporation. |
| employment taxes by $9,945.00. This is because only | | | | S-Corporation Tax Savings Calculator may help |
| the $25,000.00 salary portion would be classified as | | | | reduce income/payroll taxes. To learn more about |
| earned income and subject to payroll / self | | | | S-Corporations look to IncFile for company formation |
| employment taxes, the remaining $65,000.00 would | | | | services. |