Understanding the Potential Advantages of an S-Corporation

S Corporation, Tax Law, Illinois small business attorneyIn my practice, I am constantly asked for advice regarding which business structure I think is best. While, of course, I am happy to help my clients understand the potential advantages and disadvantages, I make it very clear that the selection of the right business entity is based on the needs and comfort level of each individual business owner or group of shareholders. A large number of my commercial clients ultimately opt for structure known as an S-Corporation, and they often do so for some of the potential tax advantages.

S-Corporations and C-Corporations

The most basic type of corporation, sometimes called a C-Corporation, establishes the business as an entity that is separate from its owners and/or shareholders. A corporation, therefore, offers protection for shareholders, as the business itself is responsible for the actions and debts it incurs. Owners and shareholders cannot be held financially liable for the affairs of the corporation.

An S Corporation, so-called for its basis in subchapter S of the tax code, is a special type of corporation that may be created by election of a company’s shareholders. By electing S-Corporation status, shareholders are afforded protection similar to that offered under a C-Corporation, but with potentially significant tax advantages. A business planning attorney can help you decide if an S-Corporation designation would be the best option for your business.

Tax Implications

The primary difference between C- and S-Corporations is that, in an S-Corporation, profits and losses are passed through to the owners’ and shareholders’ personal tax returns. Thus, all tax liability is placed on the shareholders and not on the corporation itself. Any shareholder who works for the company must also be reasonably compensated to remain in compliance with S-Corporation requirements.

Profits from a C-Corporation are, in effect, taxed twice. The corporation is first required to pay income tax on any realized profits, which are then subject to taxing again when distributed to shareholders as dividends. An S-Corporation, however, is not responsible for paying corporate income tax; instead, the shareholders pay appropriate taxes on their own personal returns, which include their respective percentages of the corporation’s income.

Consult with a Business Planning Lawyer

There are many requirements a business must meet in order to obtain and keep S-Corporation status. An experienced Naperville business law attorney can help you and your shareholders fully understand the law and the best options for your business. We are also equipped to help you continue to meet the specified requirement well into the future with careful planning and proper documentation procedures. For more information, call the Gierach Law Firm today to schedule an appointment.