Seeing your business grow may be a dream come true. It shows that you are doing something right and have made the right choice to give entrepreneurship a try.
Despite the rewards and opportunities that business growth offers, companies may also face new challenges. Among the possible results of the said growth is an increase in tax rates.
Dealing with taxes can be daunting. That is especially true if there are certain changes to the tax rates. It means needing to learn new things and consider factors you never thought of before.
In such cases, many entrepreneurs consider electing an S Corp. It is a status that offers businesses with tax benefits without removing the advantages that come with the business entity structure.
Understanding What It Is
The term S Corp is short for subchapter S corporation. Some may also refer to it as a small business corporation. However, you have to understand that it is not a business entity structure. Instead, it is a tax code that Congress enacted to encourage small and family businesses. A company can register as an LLC or corporation first and then elect the said tax status.
Generally, an S Corp is similar to a traditional corporation, which is also known as a C Corp. The main difference is the taxation treatment. Companies that elect S Corp will be taxed as a partnership. So, the company will no longer have the obligation to report and pay federal income taxes. The tax liabilities for business profits and losses are passed through to the company owners. Additionally, the company will be a single separate entity no matter how many individuals organized it.
To give you an idea as to what it is, here are some of its main features:
- No double taxation
- Pass-through taxation
- Limited liability protection
- Not more than 100 owners at a time
- Only one type of stock
- Transferable stock
- A domestic business entity
- All owners are US citizens
- Business entities cannot serve as owners or directors
Advantages of an S Corp
Electing S Corp offers multiple advantages. Here are some of those that may be beneficial for your company:
- Tax Advantages – Among the things that makes this status appealing to many entrepreneurs is that it allows a company to enjoy certain tax advantages. That includes federal income tax exemption. There is no need for your company to report income taxes at a corporate level, which ensures that profits get taxed only once. Instead, all taxes on business profits flow through to the owners, who will report them on their personal tax returns.
- Asset Protection – The S Corp status provides protection on all the personal assets of the business owners. That is because the company is a separate entity. Owners will not be held liable for any of the company’s debts and actions. So, creditors cannot go after the owners’ assets.
- Flexible Characterization of Income – S Corp allows you to choose how to characterize your income when it comes to taxes. Which means considering yourself as a company employee. If that is the case, as the owner, you will be getting paid a salary. Additionally, owners also reduce self-employment tax liabilities since they have the option to pay themselves with dividends from the company or distributions with rates lower than an employee’s salary or are tax-free.
- Transferring of Ownership – Having an S Corp also allows an entrepreneur to easily transfer their ownership without having an impact on the company’s taxes. There is also no need to stop the operations of the company or adjust properties. An S Corp also does not require compliance to complicated accounting regulations.
Knowing the Process
If you want to maintain the formal structure and liability protection that a corporation offers but want to have pass-through taxation treatment, then starting a Connecticut S Corp may be right for you.
However, you will have to formally register your company with the state first. That means you have to go through the formation process that the state has set. It includes the completion of multiple steps, filing of formal paperwork, payment of corresponding fees, and compliance with state obligations.
- Coming up with a distinguishable name – The name of a company plays a huge role. It represents the identity of the business and reflects what it is all about. In Connecticut, companies have to abide by a set of naming regulations. First, you have to make sure that you use the right designator. You should also do a name search to ensure that your desired company name is not already in use.If you are not ready to officially register your business but already have a desired name, then you have the option to reserve it. File an Application for Reservation of Name with the Secretary of State and pay $60. Doing this will reserve the name for 120 days.
- Selecting a registered agent – The state requires all companies that transact business in Connecticut to nominate a registered agent. Your registered agent will serve as the state’s point of contact with your company. They will be in charge of receiving all legal correspondence and business mail on behalf of your company.The state allows you to appoint an individual or a third-party organization like DoMyLLC that is authorized to do business in Connecticut. Read this article to find out more about state requirements and qualifications.
- Filing the necessary formal paperwork – To formally register your business with the state, you will have to submit the necessary paperwork to the Secretary of State and pay the corresponding filing fee. You can do that online or by mail. For example, if you plan on forming a corporation, file a completed Certificate of Incorporation. It costs $250. On the other hand, LLCs have to submit a Certificate of Organization. The filing fee for this submission is $120. Expedited processing service costs an additional $50.
- Issuance of stock – Corporations in Connecticut have to issue stock. The board of directors will do this at the initial corporate meeting. The amount of stock that the corporation can issue should be outlined in the Articles of Incorporation. However, to qualify for the election of S Corporation tax status, you are only allowed to have one class of stock.To ensure compliance with federal law, make sure you do not violate any of the following:
- Spouses, some family members, as well as their states can qualify as a single shareholder. Make sure you check the requirements well to prevent any issues.
- Individuals, certain trusts, estates, and entities exempted from filing and paying federal income tax are the only ones qualified to be shareholders.
- Nonresident alien individuals cannot be shareholders.
- Submitting the initial report – Connecticut requires all companies to submit an initial report. The deadline for LLCs is at the end of the month of formation, and the filing fee is $20. Meanwhile, the initial report of corporations has to be submitted within 30 days after the initial corporate meeting. It costs $150.
- Preparing bylaws – Connecticut corporations should also appoint officers and directors. The incorporators of the company will hold the initial corporate meeting and appoint members of the board of directors. The board of directors will then draft the bylaws of the corporation and elect officers. They will also define the roles of the said officers. The bylaws will serve as the operating manual for all procedures to run the company.
- Electing S Corp tax status – Once your company is formed, you can proceed to elect Connecticut S Corp. Do this by submitting a completed Form 2553 to the IRS. Make sure it has the signature of the company’s initial stockholders.
Starting an S Corp in Connecticut can give you and your company protection and flexibility. However, it requires you to complete a multi-step process. That includes the registration of the business with the state.
Knowing the basics can help you understand the whole ordeal and prevent you from making mistakes that could lead to issues. But, with the various responsibilities that you have to handle as a business owner, you may find the process a bit overwhelming. Since it involves many steps, you may also need to set aside some time to complete them. That may prevent you from focusing on other aspects of the business.
Fortunately, you do not have to do everything on your own. With the help of a reliable third-party organization like DoMyLLC, you can have a hassle-free experience. Not only can our team of experts take care of the formation documents and filing, but we can also ensure compliance with state obligations.