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S Corps: What You NEED To Know

By February 28, 2017No Comments


Let me start off by saying we don’t provide legal or accounting advice on the internet or directly to clients.  That being said, we’re in meetings frequently where we learn interesting facts and strategies that may help other clients and contacts we work with.  Please check with your attorney since they might recommend an LLC, S Corp, LLP or C Corp depending on your specific situation.  Also, there may be tax law changes coming in the near future.  For now though, these are the key points with S Corps.

What is an S Corp?

An S corporation is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation by electing to be treated as an S corporation.  What makes the S corp different from a traditional corporation (C corp) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.

Learn More About S Corp Basics Here

If the owner of an S corporation is sued, their stock can be seized, and if a majority of voting stock is seized, then a creditor can vote to liquidate the corporation, and subsequently seize corporate assets to satisfy his debt-claim. Using a charging order protected entity such as multi-member LLC or LP, would protect the stock from creditor attachment, but at the same time it would disqualify the corporation’s subchapter S tax status. However, if the LLC or LP was a disregarded entity, then according to an IRS Private Letter Ruling, the S corporation would not lose its subchapter S election.

Again, the rules are complex so if you find yourself being the owner of S Corp stock outright in your name, I’d speak with counsel about the risks associated with this if you happen to be sued.


Some people choose S Corps so they can make distributions that are not subject to the approximately 3% employment tax.  There is an important caveat, however: any shareholder who works for the company must pay themselves “reasonable compensation.” Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as “wages.”

As an example, lets assume Company A has $1,000,000 in net income after considering for the owner’s salary  of $250,000 (let’s assume there’s only 1 owner/shareholder).  You can then treat the $1,000,000 as a distribution assuming the $250,000 owner’s salary would be viewed as reasonable.  Since you took the $1,000,000 as a distribution and not wages, you’d save approximately $30,000 (or 3%) for employment and other taxes.


There are so many more characteristics and considerations for S Corps than the 3 listed above, but I wanted to focus on key areas that some people are not aware of.  To learn more about the pros and cons of S Corps, again, speak with legal counsel or conduct independent research.  Here is another posting I found discussing the pros and cons which may be helpful as well.


Jared Toren
CEO & Founder, Proper Wealth Management


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