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Should Your California Business Elect S Corporation Status? Learn About the Pros and Cons

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There are a number of common business entities, none of which is perfect for every situation. In recent years, more companies have been taking advantage of the option to elect S Corporation status. Let’s review the major business entity options and then the advantages of an S Corporation. Then call Law Offices of Torrence L. Howell at (909) 920-0908 for a free case evaluation with a business law attorney.

The most common types of business entities

There are five types of business entity that are more common than others. They include:

  • Sole proprietorship.
  • Partnership.
  • Corporation (also known as a C Corporation).
  • Limited Liability Company (often referred to as an LLC)
  • S Corporation.

The right option for your business will vary based on many factors, which is why your best bet is work with an attorney who has experience with forming corporations and LLCs.

What is an S Corporation?

An S Corporation, unlike other options, isn’t an entity that’s formed through the Office of the California Secretary of State. Instead, it’s a type of tax election that you make with the IRS. It essentially indicates that the owners of the company want to be taxed differently compared to the default treatment for whatever their entity is.

Not every company can elect S Corporation status

In order to quality for S Corporation status, there are specific requirements your company must meet. First, you must be an American company or LLC. Second, your shareholders can be individuals or certain trust and estates, but can’t be corporations, partnerships, or non-resident alien shareholders. In totally, your shareholder / members can’t number more than 100.

Other requirements include only having a single class of stock or ownership interest and not being certain corporations that are ineligible. For example, some financial institutions and insurance companies can’t elect S Corporation status. To find out for sure if your company qualifies, reach out to Law Offices of Torrence L. Howell at (909) 920-0908 for more information.

There is one main benefit to electing S Corporation status

While there are actually a few different benefits to electing S Corporation status, the main advantage to both LLCS (both with a single member or with many members) is that you can take money out of the company without having to pay employment taxes.

How is this possible? Simple: You don’t have to pay employment taxes on dividends from your S Corporation. Put another way, the earnings and profits that go into your company and then to you, as he owner, aren’t taxed as income. They are taxed, but in a different (and typically lower) amount than if they were taxed as employment moneys.

The largest your dividends are, the lower your employment tax will be. As a result, an S Corporation makes it possible for you to save on Medicare and Social Security taxes. To learn more about this and other options, reach out to Law Offices of Torrence L. Howell at (909) 920-0908 for your free case evaluation. We are here to answer your questions and get your company moving forward.

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