Due to our business being a moderate restaurant group with about 60 shareholders, we have elected to pursue an S type corporation as our ownership model. “S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.” (IRS, 2018) This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
While using the corporate structure is more complex and expensive than most other business structures we feel as though the benefits outweigh the disadvantages. While a LLC is also an appealing choice, the election of an S corporation allows shareholders to avoid double taxation. By claiming “reasonable” earnings through a salary, shareholders avoid double taxation. “For most businesses, it only makes sense to register for S-corp status if you will save on taxes. To figure that out, first, identify a reasonable salary for someone with your job description. If any profit remains after paying yourself, then it is probably worth looking into S-corp designation.” Also all income and losses are passed onto the shareholders. The corporation must withhold and pay social security and Medicare taxes on its employees for tax purposes, however, distributions to shareholders are not subject to those taxes. (Ramsay, 2019) Thus, the more revenue received by an employee/shareholder in her capacity as a shareholder, the less Medicare and social security taxes. (Ninan, 2018) However, there is room for risk; if a corporation does not follow their articles of incorporation and all legal parameters, a court can pierce the corporate veil and hold you and the other owners personally liable for the business’s debts.
IRS. (2018). S Corporations. Retrieved May 28, 2020, from https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
Ninan, G. (2018, May 29). Council Post: Should You Form An LLC Or An S-Corp, And What’s The Difference? Retrieved May 28, 2020, from https://www.forbes.com/sites/forbesnycouncil/2018/05/29/should-you-form-an-llc-or-an-s-corp-and-whats-the-difference/
Ramsay, J. (2019, March 19). Choose Your Business Structure. Retrieved May 28, 2020, from https://www.entrepreneur.com/article/38822