Incorporating has its benefits- but one of the downsides to a corporation comes when the business is successful. When a corporation is successful, the shareholders will be expecting dividends. The pressure is even greater when the corporation is a publicly traded stock…shareholders will get rid of your stock if you never pay a dividend.
As you know, a corporation is treated as a separate tax identity from the shareholders. The corporation can enter into a contract just as real person can. The corporation must also pay income taxes…and not just every year but every quarter! Yes that’s right a C-corporation pays quarterly income taxes. Also, taxable income is computed before any business expense deductions are made! As you know, Business Deductions are a great thing that help reduce taxable income if you are any type of business but a C-Corporation. Plus, it pays income tax on the revenue, then when that extra revenue is passed on to shareholders, it gets taxed again. That’s called double taxation.
Why Become an S-Corporation?
To avoid double taxation some corporations elect to become what’s called an S-Corporation. To do this, IRS Form 2553 is submitted to make the election. The name of the form is Election by a Small Business Corporation. By becoming a S-Corporation a business can now participate in what’s called pass through taxation. That means the profits can be passed through to the shareholders, and the S-corp is not taxed on that money as income. Great!
Filling out IRS Form 2553 to become an S-Corp also means your business files a tax return once a year rather than four times a year.
If You Fill Out IRS Form 2553, Do it Now!
There are strict timing issues around filing IRS Form 2553. Your business must file the form withing 75 days of incorporation or the IRS will disregard and consider your business a C Corporation. The alternative is to file within 75 days of the new year. For a look at IRS Form 2553 go here to the IRS website. It’s a short and simple form that can be filled out quickly and mailed in easily to the IRS. It’s not a form that you should pay someone to fill out and submit for you.