Setting Up a Business
Choosing the right tax structure for your business is crucial, so I wanted to give you a quick summary to keep you informed and up to date:
Benefits of S Corp Election:
Pass-through Taxation
Profits pass through to shareholders' personal tax returns, avoiding double taxation.
Tax Savings:
Shareholders can receive distributions without paying self-employment taxes on them, resulting in potential tax savings.
QBI Deduction:
Eligible S Corp owners may qualify for the Qualified Business Income deduction, providing additional tax benefits.
Reduced Taxable Gains:
S Corps may have reduced taxable gains when the business is sold.
Write-off Start-up Losses:
Start-up losses can be offset against personal income.
2 Downsides of S Corp Election:
1. Limited Stock Classes:
S Corps are restricted to one class of stock, limiting flexibility and control.
2. Less Attractive to Outside Investors:
Venture capitalists may prefer other structures due to pass-through taxation and shareholder limitations.
Considerations and Requirements:
Shareholder Limit:
S Corps are limited to 100 shareholders.
Domestic Entity Requirement:
The business entity must be domestic.
Shareholder Qualifications:
Shareholders must be U.S. citizens or legal residents.
Single Class of Stock:
S Corps can only have one class of stock.
Forming an S Corp:
Ensure your business meets the requirements.
File an S Corp election using IRS Form 2553.
Final Thoughts:
S Corp status may not be suitable for all businesses, and careful evaluation is necessary.
Consider factors such as profit levels, flexibility, and long-term goals before making a decision.
Setting up the right business structure is incredibly important. If you have any more questions on how to do so, please feel free to call or email at (615) 844-3398 or Jim.Maddux@raymondjames.com.
Disclosure:
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
