The S Corporation can be a powerful tax-savings tool for many small businesses. But despite its popularity, there is still a lot of confusion surrounding S Corporations.

Let’s smash a few common myths about S Corps:

 

Myth #1: S Corporations are a great business entity.

Truth: S Corps are NOT business entities like an LLC or a corporation. It is merely a tax election that an entity can make.

Myth #2: Anybody can set up an S Corp.

Truth: The IRS has restrictions on who can make an S Corp election.  For example, there can be no more than 100 shareholders, there can only be one class of stock, and the shareholders must be US citizens or legal residents.

Myth #3: S Corps avoid self-employment tax.

Truth: it’s true that S Corp owners won’t have to pay self-employment tax on their income, but they will have to pay FICA taxes instead. Self-employment taxes are social security and medicare taxes paid by those who are self-employed while FICA is taxes shared by employees and employers. 

Myth #4: the S Corp election can be made at any time. Truth: the election has to be made within 2.5 months after the business is formed, or 2.5 months following the beginning of each year. 

Myth #5: it’s always better to be an S Corp. Truth: even though S Corps are typically going to result in lower tax bills, S corps require more attention administratively.

 

So while the S Corporation election can be beneficial for many small businesses and business owners, S Corps certainly are not for everyone. Because every business’s situation is different, it’s always best to consult with an attorney or tax professional before making an S Corp election.

If you are interested in making an S Corp election for your Colorado business, send us a message or schedule a Discovery Call now to get started!


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