S-Corporation Taxation

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S-Corporation Taxation



Corporate Structures & Strategies

For most small business owners, it is important that they are able to 1) mitigate taxes so that they can keep more of the money they earn and 2) that they are protected from any personal liability arising from the operation of their business. Operating your business as an S-corporation is one of the best ways to mitigate taxes and enjoy a great deal of personal liability protection.

The necessary forms can be found and filed online at the Secretary of State website. When filling out your articles, you will be required to include the following information: your corporation’s name, the principal place of business for your corporation, your registered agent’s information, your incorporator’s information, and the class and number of any shares your corporation has been authorized to issue.

S-Corporations vs. C-Corporations

S-corporations differ from C-corporations in that they receive more tax benefits because they are considered a flow-through tax entity. This is because, just like a sole proprietorship, partnership, or LLC, the profits and losses of an S-corporation flow through to their shareholders' personal tax returns.

A C-corporation is the most common type of business entity structure in the United States. C-corporations are legal entities set up under state law that protect the owners' assets from personal liability arising from business operations.

C-corporations are popular because they offer a number of advantages, namely:

  • Limited personal liability
  • The ability to sell stock to raise money and grow
  • Unlimited shareholders
  • The ability to deduct tax-exempt business expenses

However, a C-corporation is a separate taxpayer, with income and expenses taxed at both the corporate and the personal level. C-corporations pay income tax on corporate profits, then those profits are taxed again at the personal income tax level when they are distributed to the shareholders as dividends, creating double taxation.

Double taxation is a huge disadvantage of C-corporations. However, once you have incorporated as a C-corporation, you can elect “S-corporation” status by filing a form with the IRS and with the state. Once S-corporation status is applicable, your business’s profits and losses and other tax liabilities will pass through to you to be reported on your personal income tax return, thereby avoiding double taxation.

The Basic Aspects of S-Corporation Taxation

The basic aspects of S-corporation taxation are as follows:


Monthly Payroll Taxes

S-corporations are employers by default. Therefore, you will technically be an employee of your S-corporation. Consequently, you will need to file monthly payroll deposits the first year and observe all other employer-related rules and regulations.


Quarterly Estimated Income Tax Payments

Unlike a C-corporation, your S-corporation will not need to make estimated quarterly tax payments, since profits generated by your S-corporation will pass through to you as dividends. However, you will need to make quarterly estimated income tax payments on these dividends.


Franchise Taxes

Some states require a minimum annual franchise tax for all S-corporations, even if your business is not profitable. However, Colorado does not have a franchise tax.


Self Employment Taxes

Lastly, S-corporation owners are able to mitigate self-employment taxes (Social Security Taxes and Medicare Taxes). This is because with an S-corporation, the owners only pay self-employment taxes on any salary they receive from the corporation, but not on dividends.

Forming an S-Corporation

As you might have guessed, forming an S-corporation is a very involved process. Here are some of the basics:

  1. You will need to file articles of incorporation and some simple paperwork with the state. This requires a flat fee that is typically between$50-$150.
  2. You will also need to hire and identify a registered agent, which can cost $40-$60 per year. The purpose of the registered agent is to provide your business with an address where there is someone available during normal business hours to facilitate the legal service process when being served in the event of a lawsuit.
  3. Other requirements include electing directors, issuing stock certificates to initial shareholders, and creating corporate bylaws during the registration process.
  4. Lastly, you will need to file form 2553 with the IRS to confirm your election as an S-corporation.

Other Corporate Obligations of an S-Corporation

An S-corporation is more high maintenance than some other business entity structures and after you have formed your S-corporation, you will need to meet certain corporate obligations, including:

  1. Holding annual shareholder meetings and periodic directors meetings, as well as, keeping detailed records of what these meetings consist of (recorded minutes)
  2. Keeping detailed financial reports of income and shareholder dividends
  3. Filing separate income returns
  4. Maintaining total separation between the finances of the corporation and its owners

Contact an Experienced Colorado Business Law Attorney

One of the main advantages of being an S-corporation is that if corporate formalities are followed, they typically provide a high level of flexibility and personal liability protection for its owners, while offering the tax benefits of other flow-though tax entities. For information about forming a Colorado S-corporation, contact an experienced Colorado business law attorney today to arrange a free consultation.

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