S corporations are pass-through entities, which means that their shareholders’ personal tax returns receive the business’s revenue, deductions, and credits. Although the S corp does not personally pay federal income taxes, it is nonetheless required to file Form 1120 in order to disclose its earnings and outgoings. To calculate the shareholders’ taxable income, which is then reported on their personal tax returns, a S corp must file Form 1120.
An S corp’s drawback is that there are stringent eligibility requirements. The company must only have 100 shareholders who are either citizens of the United States or lawful permanent residents in order to be eligible. S corporations are also limited in the kinds of stock they can issue and are only permitted to issue one class of stock. Additionally, S corporations are subject to additional taxes including the excess net passive investment income tax and the built-in gains tax.
Despite these restrictions, S corps are nevertheless popular among small business owners due to the tax advantages. Double taxation, which happens when regular corporations pay corporate income tax and then the shareholders pay personal income tax on the profits they get, is not an issue for S corps. S corporations, in contrast, have a single level of taxation for shareholders. Additionally, by taking a reasonable wage and subsequently getting distributions from the company, S corp stockholders may be able to reduce their self-employment taxes.
There are a few things to consider if you already have an LLC and want to register as a S corp. First, you must satisfy the prerequisites for becoming a S corporation, which include having no more than 100 stockholders and issuing only one kind of stock. Second, you must elect S corp status by submitting Form 2553 to the IRS within 75 days of the LLC’s formation or by March 15th of the tax year you desire to be taxed as a S corp. Finally, because filing as a S corp may not be the ideal option for every firm, it’s crucial to weigh the costs and advantages of doing so.
You might be asking if you still need to submit Form 1120 if your S corp had a loss for the tax year. Yes, even if there were no income or expenses to declare, you must still file. Maintaining compliance with all tax obligations is crucial to avoid IRS penalties and fines for failure to file.
S companies are required to file Form 1120, although they differ from ordinary corporations in a few ways. Although there are drawbacks to creating a S corp, many small business owners choose for this type of legal structure because of the tax advantages. Make sure you meet the eligibility standards and thoroughly analyze the expenses and benefits before establishing your LLC as a S corp. And keep in mind that you must still submit Form 1120 even if your S corp generated no revenue in order to avoid penalties and fines.