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