S corporations have become an increasingly popular business structure for many small businesses due to their tax advantages and liability protection.
And they are a common tool among tax planners.
But entity planning isn’t a one-size-fits-all approach.
There are several important factors to consider before electing S-Corp status.
Here’s what you need to know when selecting an S-Corp:
Eligibility for S-Corp:
- Must be a domestic corporation
- Cannot have more than 100 shareholders
- Shareholders must be individuals, certain trusts, or estates (no partnerships or corporations)
- Only one class of stock is allowed
- Cannot have non-resident alien shareholders
Compensation for S-Corp:
- S Corp owners who work in the business must be paid a “reasonable” salary
- The IRS scrutinizes S-corps to ensure owners aren’t underpaying themselves to avoid payroll taxes
- Remaining profits can be distributed as dividends, which aren’t subject to self-employment tax