Yes, under certain conditions a sole proprietor may elect to be taxed as a S corporation (S corp). A kind of organization known as a S corp allows its shareholders to record the company’s profits on their individual tax returns by passing through its income, deductions, and credits to them. By doing this, double taxation is prevented, which happens when a firm pays taxes on its income and shareholders pay taxes on dividends.
However, a lone proprietor must first incorporate their business or create an LLC before they can choose the S corp classification. As a result, the owner must file articles of incorporation or organization with the state and the business must have a different legal structure from them.
The owner can choose to be taxed as a S corp by submitting Form 2553 with the IRS after the business has been established or constituted as an LLC. Anytime during the tax year preceding to the one in which the election is to take effect, or within 75 days of the start of the tax year, this form must be submitted.
In comparison to an LLC or sole proprietorship, a S corp often pays less in taxes. This is due to the fact that an LLC’s revenue is subject to self-employment taxes, which may be higher, but the income of a S corp is only taxed once, at the shareholder level.
Why then would an LLC register as a S corporation? The primary justification is to reduce self-employment taxes. Shareholders in S corporations are permitted to pay themselves salaries and receive distributions that are not taxed as self-employment income. The owner may save a lot of money on taxes as a result of this.
However, having a S company has its drawbacks as well. S corporations, for instance, must comply with more rules and procedures than LLCs or sole proprietorships. Annual shareholder meetings are required, and thorough financial records must be kept. S corporations are also limited to 100 stockholders, all of whom must be US citizens or legal residents.
Finally, even though a lone owner can become a S corp, doing so involves creating an LLC or incorporating first. Based on the owner’s tax condition and company requirements, the choice to file as a S corp should be made. Although a S company can reduce self-employment taxes, it also has more rules and limitations. To be sure you are choosing the best option for your company, it is crucial to speak with a tax expert before making any changes to your business structure.