(Day 3) You, S or C

Reading time: 3 – 4 minutes

When you set up your corporation most likely you will want to make a S-Corp. declaration. A S-Corp declaration makes sure the IRS and the State sees your corporation like a Sole Proprietorship aka you are the corporation. For tax purposes this is a big deal because in a regular corporation structure “C” you get taxed twice. All corporations start off as a C-Corp so you have to elect to be a S-Corp immediately. So when you get your corporation papers filed immediately you should file the form IRS 2553 to make sure you don’t have any issues when taxes come up because you slept on it.

Electing to be a S-Corp

• File IRS form 2533 –> HERE
• Make sure you pick that the taxes end at the natural end of the tax year December (so you won’t be confused later)
• Make sure you put yourself as the 100% stockholder since you are a 1 person company
• Send/fax this in immediately as they will tell you when your tax year is effective. You might want to start the business under the corporate name after the tax year is effective.

Why a S-Corp – IRS explanation HERE

• The biggest benefit is that you only get taxed once. Under a “C” corp the corporation gets taxed and then you get taxed on the same money.
• You file taxes on your 1040 but you also have to do a small tax form called a 1120S showing the money you made on your corporation. It’s just one more paper for your accountant so it’s not a whole other set of forms.
• When your company turns into Coca Cola and you want to put it on the NASDAQ you can switch back to a “C” corporation so you can bring on more than 100 shareholders

Drawbacks to a S-Corp

• Really there aren’t any for a small company just starting up.
• You can go from a S to a C but you can’t come back to being a S.  Once you declare for a S that’s it so when you go big and turn back into a C make sure you are getting ready to go BIG.

There is hardly ever a reason to be a C-corp unless you want to be publicly traded on Wall St. Until then it is of a great benefit to you to stay a S-corp. In fact when you hear someone on the Stock Market shows say they are a privately held company usually that means they are a S-Corp.

Now other people will tell you to start a LLC like that is better but truth be told it’s not. A corporation is what all the laws of this country are based off of so all the protection lies with them. LLP and LLC are relatively new business structures so the law hasn’t been completely written on them but the laws on corporations have. Corporations go all the way back to the beginning of this country so you need to be aware that this is the main structure to do business under in this country.

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