What is s-corporation entity type?
An S-Corporation entity type is similar to a regular corporation (also known as a C Corporation) with one key difference: pass-through taxation. As with a C-Corporation, an S-Corporation must file articles of corporation and fulfill certain legal obligations to remain in compliant, including having a board of director, officers and a Registered Agent. These requirements come with the bonus of limited liability for shareholders, much like a traditional corporation.
Pass-through taxation refers to letting owners and shareholders have the profits taxed at the individual level, similar to what occurs with a partnership. In a traditional corporation, the business must pay income taxes on the profits, and then the owners or shareholders must also pay taxes on their share of the profits, known as dividends.
Other Key Differences Between S and C Corporations
Another difference between an S-Corporation and a C-Corporation is that there is a limit to 100 shareholders. Additionally, a single-owner S-Corporation might find it difficult to maintain their S-corporation status with the IRS.
How to Become an S-Corporation
To become an S-Corporation, you must first incorporate as a traditional corporation. Then, you file IRS Form 2553 prior to the 16th day of the third month after the corporate tax year closes. The IRS reviews your file to determine if you meet the requirements. If they feel you do, then they will designate you as an S Corporation for the tax year.
The one downside of having pass-through taxation is that the owners or shareholders remain liable for the taxes even if the funds are not distributed for a given year. When a corporation is traditionally taxed, owners or shareholders only have to pay tax upon the distribution of the dividends since the business has already paid taxes on the profits.
When you set up your S-Corporation, you want to make sure you have your IRS-EIN-Tax-ID. At IRS EIN Tax ID Filing Service, we assist you with filing for an S Corp Tax ID number. Contact us to learn more about our services or if you need another type of federal tax ID number.