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Don't believe everything you hear about S corporations

When starting a new business here in Arizona, one of your first priorities may be to choose the type of entity under which you want to operate. There are numerous choices, but you lean toward an S corporation. Unfortunately, you may have heard things about this entity type that give you pause.

In order to make an informed decision, it might be helpful to dispel some myths about S corporations. Once you have all of the information you need, you can make the best decision possible for your new company.

Setting the record straight

The following information provides some basic information about S corporations:

  • The "S" stands for subchapter S in IRS Title 1. Someone may have told you that it stands for small business, but that's not true.
  • Similarly, you may have heard that any small business may form this type of entity. In fact, your company must meet certain requirements in order to form this type of entity.
  • The formation of an S corporation varies from that of a regular corporation.
  • There is a time limit for choosing sub-S status. The IRS limits your time to choose to two months and 15 days into your elected tax year takes effect. 
  • The IRS handles taxation of an S corporation differently than for regular corporations. They work more like the tax structure of a limited liability company or partnership. Other aspects of this entity's tax structure differ from corporations as well. For instance, S corporations are not subject to the double taxation of corporations in which the corporation pays income tax and then shareholders pay income tax on their dividends.

The good thing is that S corporations do provide a certain measure of protection from personal liability, but you do have to adhere to many of the same reporting requirements as corporations.

Making your choice

The above include general information about how an S corporation actually works. To get more detailed answers to your questions, you may benefit from discussing this type of entity with an attorney who handles business formation issues on behalf of new companies. Once you make your decision, having assistance with meeting the legal requirements for this entity may keep you from having issues later.

Your choice of entity can steer the future of your company. Even if you think that an S corporation would be the way to go, it may be beneficial to obtain more information about your other options as well. You may or may not discover that a different type of entity would better serve your purposes.

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