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Thursday, July 10, 2014

NJ Business Attorney Peter Lamont Explains the Basics of an S Corp

An S Corp, short for an S Corporation, is one of the many different business structures you can choose from when starting your own business. To put it simply an S Corp is a ‘special’ corporation that can only be formed through a tax election from the IRS. What sets an S corporation apart from a ‘regular’ corporation is the Subchapters it is given by the IRS.

Registering your business structure as an S Corporation is not as straight forward as forming a corporation or even a Limited Liability Company. To become an S Corporation your business must first be formed as a corporation in the state where headquarters are located. If your business’s headquarters are in CA, then you must form a corporation in CA. Businesses must also meet a series of ‘tests’ from the IRS before they can become an S Corp. For example, the IRS states the business cannot have more than 100 shareholders, the shareholders can only be individual, estates, exempt organizations, and certain trusts, which further details of what trusts and organization qualify, can be found in the IRS Code.

To further understand what an S Corporation is you have to understand how it is different from other structures. What makes the S Corporation stand out from a corporation is how the profits are taxed. With a corporation both the shareholders and the corporation are taxed, the corporation must pay taxes on its profits and the shareholders must pay taxes on any dividends they receive. With an S Corporation, this ‘double taxation’ is avoided as the profits or losses are passed through to the shareholders personal income tax returns. In this case, the business itself is not taxed on its profits; just the shareholders are taxed on any profit or loss they made through the business.

An S Corporation also stands out from other business structures in terms of liability. With a corporation, the shareholders are not financially responsible for any actions brought against the corporation. Even though the IRS states that an S Corporation is “considered by law to be a unique entity, separate and apart from those who own it,” this is not always the case. Yes your financial liability is limited when you structure your business as an S Corporation, but you can still be held financially responsible for certain things. For example, an employee brings a lawsuit against the business based on a workplace incident and wins a lump sum, as a shareholder you will be held responsible for paying a portion of that lump sum. However, you as a shareholder will not be financially responsible for the debts of the corporation.

The IRS taxes all S Corporations the same, but not all states use the federal guidelines. While most states follow the IRS guidelines, some will tax profits above a certain amount, such as Massachusetts. Other states simply do not recognize S Corporations and simply treat the business as a ‘regular’ corporation. For example, New York taxes the corporation’s profits, as well as the shareholders share of the profits.
If you would like more information about this topic or have general legal questions, please feel free to contact me at (973)949-3770 or via email at plamont@peterlamontesq.com We answer legal questions on a daily basis and would be happy to discuss any issues or questions that you have with you.  Offices in: New Jersey New York, Colorado & Puerto Rico.  Affiliated throughout the country.

© 2014, Law Offices of Peter J. Lamont. This Update is provided for informational purposes only. It is not intended as legal advice nor does it create an attorney/client relationship between the firm and any readers or recipients. Readers should consult counsel of their own choosing to discuss how these matters relate to their individual circumstances. This Update may be considered attorney advertising in some states. Furthermore, prior results do not guarantee a similar outcome.
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