Nothing can be more intimidating than tax time to those who own their own business. Any misstep could be to your detriment, both financially and legally. Classifications of your business and the elections you choose are not to be taken lightly and can have a significant impact on your business’ longevity. So what is a subchapter S election and is it the right choice for your business? Let’s explore this.
Whether you are a domestic corporation, have filed as a Sub-S within the last five years, have met the specific requirements as laid out by your accountant, or are a disregarded entity – LLC, you may be contemplating the Sub-S election for your business. It is a more cost effective and usually a quicker way of forming your business and for those reasons alone may be right for you. This may be especially true if you have no intention of taking on debt via outside capital and have no more than 100 shareholders within the U.S. and no foreign shareholders with claims to your business.
A primary motivator for the Sub-S corporation formation of a business is that in filing as a Subchapter-S corporation, there is only a single taxation, excluding taxation on your income. Therefore, those earnings and your losses can be passed directly through to your shareholders. Because shareholder earnings are not subjected to Medicare and Social Security taxes, the more a shareholder makes, the less the corporation must pay in those taxes. This can equate to significant savings on payroll taxation.
That does bring up disadvantages. The Sub-S corporation is required to pay into Medicare and Social Security for its employees, and it is met with scrutiny over how much shareholders earn that does not have these taxes deducted. If you are comfortable with that scrutiny and can function with a balance there, this may be the right, albeit, less common, choice for your business.
A business law attorney based in Ohio may be able to provide clarity on the type of entity formation that is right for you. A great aspect of the Sub-S corporation is that you can convert it to an LLC as your business grows and changes. Your attorney can help you know when and if the time is right.