How to Run an S Corporation

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Most businesses in the U.S. are operated as either sole proprietorships, partnerships or corporations. Each business structure has its relative advantages and disadvantages, depending largely on the size and business model of the business, and there are several subtypes of partnerships and corporations to consider. C corporations are the traditional corporate structure and offer significant organizational and legal advantages, including easier access to loans and less liability for owners/operators. But they face the burden of double taxation. S corporations, on the other hand, offer most of the advantages of traditional corporations with pass-through income distribution that allows for single taxation. S corps, however, are only for smaller business entities with fewer than 100 shareholders and only one class of stock.

Study the accounting and tax regulations surrounding S corporations. While they are structured as "pass-through entities," which means that any profits flow directly through to the owners as unearned income and are not taxed at the corporate level, there are still several other tax-related matters to be considered.

Determine a reasonable salary, based on what others with similar skills and experience are being paid in your area, to pay yourself and any other employees of the S corporation. It is important to not underpay yourself or other employees, as that kind of effort to claim most of your income as unearned income when you are actively involved in running the business can be considered tax fraud.

Be very diligent in your accounting and tax procedures regarding the sale of assets if you have an S corp that was formerly a partnership or C corp. The sale of appreciated assets is very likely a taxable event where the rules of the former corporate structure apply. Check with your accountant and/or tax attorney in these kinds of complex situations.

Tips & Warnings

  • S corporations are an especially ideal structure for tax purposes if the business is anticipated to have losses for the first few years and the owners have other profits they are looking to offset. This is because the losses in S corporations, like the profits, pass straight through to the owners and are reported on their tax returns.

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