Want to know how to form a S Corporation?

Before you start a business, be sure to do your homework. Hire a professional to help you through the process, review the advantages and disadvantages of each type of business, and establish business lines of credit so that you can have sufficient capitalization for your venture.

The first step is to take off your do-it-yourself hat. If you want to be successful in business, it’s important to surround yourself with others who can guide you through the process and avoid costly mistakes. That’s why you’ll want to hire a professional to take care of matters that you’re not familiar with. Before you file the paperwork, hire a professional business advisor who can walk you through the process and will be available to help you in the early stages of your business. Ideally, the company you seek does more than just form the S corporation. As you know, 80-95% of business owners fail within 5 years. The key is for that company to provide you resources to help grow your business to the next level!

There are several advantages to forming an S Corporation. Here are just a few. Check with a professional business consultant for a full list of advantages:

You won’t pay corporate taxes. This means that you won’t have to pay the double taxation penalty that corporations must pay. This means huge tax savings for the owner(s) because it passes through your personal income taxes. However, you’re expected to pay yourself a reasonable salary by industry standards. Your salary is taxed at 15.3%, the same amount as self-employment tax. The IRS keeps an eye on businesses that pay unreasonably low salaries in order to avoid taxes, so be realistic when you determine your salary to avoid the IRS red flag.

You’ll have heightened liability protection. While you won’t be protected for everything, for the most part, you personal property is protected when you’re dealing with creditors, liens, and lawsuits. Become familiar with the liability protection that is available (and not available) by forming an LLC taxed as an S corporation vs. just an S corporation.

Taxable gains are reduced. If you should ever decide to sell the business, you may pay less on taxable gains than you would with a corporation.

Once you’ve hired a consultant and have decided to move forward, you’ll have to file Form 2553 with the IRS to get started (keep in mind you may have to file a similar form at the state level also). Here are some of the requirements:

You cannot have more than 100 shareholders. If a husband and wife jointly form an S Corporation, they are considered as one shareholder. Certain trusts, estates, and individuals qualify as shareholders in the S Corporation structure, as long as they are American citizens. This is a problem if you are looking to have investors and you later realize that an investor may not invest into your S corporation as a Corporation, LLC taxed as a partnership or foreigner.

All shareholders agree to the S Corporation structure. Presumably you’ll all be in agreement but if you’re not, you cannot form an S Corporation entity.

You must form your domestic company within the United States. Please check with individual states because laws vary regarding business requirements.

Once you’ve filed the paperwork, be sure to plan ahead and establish business lines of credit. Credit is awarded according to the cash you have on hand, not your need for it. Stop using your personal credit cards and pay down the balances. The more responsible you are personally, the more likely you’ll be able to establish credit for your business.

Starting an S Corporation does not have to be a headache. Consult with a professional so you’ll avoid the costly mistakes that come with inexperience. Then you can focus on taking your business straight to the top of your market.

If you want to form a Limited Liability Company that will be taxed as an S Corporation, you’ll want to know some basic information before you start a business. Many people choose to form their companies as an LLC but with the S Corporation taxation election. Why?

There are two parts involved, taxes and liability advantages. There is a tax advantage in most cases because having an entity taxed as an S corporation allows the owners to save on self-employment taxes (which are 15.3% up to $106,800 of earned income in 2009) on distributions of profits. It is very important to take a reasonable salary when you have either an S corporation or an LLC taxed as an S corporation.

The IRS does not like an owner of an S corporation to take only distributions that are not subject to SE taxes. A reasonable salary is the key. Second, point is that an LLC taxed as an S corporation has an extra layer of liability protection vs. just an S corporation. That is called the “charging order” protection.

These are the two main reasons it may be to your benefit to start a business and form an LLC, yet tax it as an S Corporation. Key point: make sure you file form 2553 federally with the IRS to make the S election in a timely manor (plus some states require a state form to be filed also).

Because the owner of the LLC is self-employed, 15.3% of all earnings up to $106,800 in 2009 are subject to self-employment taxes. For instance, let’s say that you earned $60,000 last year in your LLC. You would pay $9,180 in self-employment tax. That money will go toward your Social Security and Medicaid payments. However, there is a way to earn a lucrative salary without taking a hit on all of the profits.

Let’s say that you formed an LLC taxed as an S Corporation. You earn the same amount of money but pay yourself a salary of $40,000. You’ll pay only $6,120 in self-employment tax. That’s a tax savings of $3,060. S Corporations can elect to pay the remaining $20,000 in earnings as a distribution from the company. As an LLC, you can also elect to split the profits in this manner, as long as you follow IRS guidelines. That’s where the tax savings comes into play.

If you want to form an LLC but want the tax advantages of an S Corporation, you’ll have to get permission from the IRS by filing Form 2553. Timing is crucial, however. This form is due by the 15th day of the third month of the tax year. If you formed your company in May, you’ll have until August 15 to file. Miss that deadline, and you will not be able to take advantage of S Corporation tax savings.

Keep in mind that an LLC taxed as an S corporation may not be beneficial to everyone. For example, in California a licensed professional cannot form an LLC so their best option may be a corporation. Because you have three months to file for S Corporation tax status, make it a priority to seek professional assistance before making the final decision. For many small business owners, however, the ease of management that a Limited Liability Company offers combined with the lower taxes of an S Corporation make this decision an easy one to make.