The potential tax advantages of the S-Corp structure are a big draw for many small business owners. An S-Corp does not, contrary to popular belief, need workers. An S-Corp can actually exist without any employees.
A company that chooses to become an S-Corp is regarded as a pass-through organization for taxation reasons. This indicates that the business does not tax its own profits. Instead, the shareholders receive a pass-through of the profits, which they then declare on their own tax returns. Small business owners may significantly reduce their tax burden as a result of this.
So, if a company has no employees, can it still be categorized as an S-Corp? Yes, it is the answer. In fact, a lot of tiny enterprises have just one owner who also serves as the only employee and are set up as S-Corps. The company can be classified as an S-Corp provided it satisfies the other criteria, including being a domestic corporation and having no more than 100 shareholders.
It is important to keep in mind, nevertheless, that having no employees may reduce an S-Corp’s tax advantages. The opportunity to pay yourself a respectable wage and then collect additional profits as distributions, which are taxed at a reduced rate, is one of the key benefits of this structure. However, if there are no employees, you are unable to apply this tactic by paying yourself a salary.
The corporation will revert to its prior tax classification if a business owner decides to cancel their S-Corp election. Depending on the company’s structure, this can be a C-Corp, a single proprietorship, or a partnership.
It’s crucial to remember that revocation of an S-Corp election may have tax repercussions. If the business owns assets that have increased in value, such stocks or real estate, there may be severe tax ramifications when the assets are sold. Before making any adjustments to your company’s tax categorization, it’s crucial to speak with a tax expert.
By submitting Form 1120S to the IRS, a business owner can cancel their S-Corp election at any time. The fact that there are limitations on when a company can choose S-Corp status again should be noted. For instance, a corporation cannot choose the S-Corp classification again until five years have elapsed if its status was revoked within the previous five years.
The S-Corp election of a business owner is generally revocable at any moment. Before making any changes to your company’s tax classification, it is crucial to carefully analyze the potential tax ramifications. It is advised that you speak with a tax expert if you have any queries or worries about the S-Corp structure or withdrawing an S-Corp election.