Your business structure is an important consideration—it determines how you’re taxed, whether you can be held personally liable in lawsuits and more. Not every business qualifies to become an S corp in Austin, TX, but it can be a smart structure for many. If you aren’t sure whether to form a corporation or how to handle the process, an attorney can provide guidance and help you get your incorporation completed.
What is an S corp?
A S corporation is a small business corporation, which allows the business to be taxed more like a sole proprietorship or partnership. This means the business won’t be subject to the normal corporate tax structure.
In order to qualify as an S corp, your business may have no more than 100 employees and 75 shareholders. It must be a United States business, and cannot be owned by corporations, partnerships or non-resident aliens. (However, individual owners and some trusts and estates qualify.) Finally, you may only offer one class of stock. As long as all shareholders agree on whether to form an S corporation, and you meet these other requirements, you may form an S corp in any state.
If you’re not sure whether your company meets these guidelines, working with an attorney can help you identify the appropriate business structure.
Benefits and drawbacks to forming an S corp
Here’s a closer look at some of the advantages and disadvantages associated with forming a S corporation:
- Avoid corporate tax: Naturally, the biggest benefit of forming an S corp is that you won’t be subject to corporate taxation. Instead, your profits and losses pass through to the owners’ personal income tax. This is similar to how an LLC is taxed, although that is a separate business structure. Keep in mind that you’ll still need to file a business income tax return each year.
- Reduced taxable gains: When you sell a business, you’ll be taxed on any gains you receive. S corp business structures reduce your tax liability in Austin, TX. This is ideal if you plan to sell your business as a retirement plan.
- Protection from liability: Forming a corporation limits your personal liability in most business lawsuits. It’s not a complete protection, however, and many lenders now require personal guarantees.
- Write off startup losses: Unlike regular corporations, S corps allow you to write off any losses from your business on your personal income tax return. Traditional corporations require that any losses are within the company only.
- Required corporate meetings: You are still required to hold regular corporate meetings and keep minutes, which can add to your operating time.
- One class of stock can be limiting: This can limit your stock’s value, and doesn’t allow for as much control as traditional corporations have.
May not be as attractive to investors: Finally, if you need outside capital, you’re less likely to get it with an S corp—investors won’t appreciate the 75-shareholder limit or the pass-through taxes.
If you’re not sure whether an S corp is the right solution for you, <a href=”/” title=”Burk Law Firm”>Burk Law Firm, P.C.</a> can help. Call today to get started forming your business structure in Austin, TX.