Small business owners prefer S-Corps because they provide corporate benefits without subjecting them to double taxation. However, in order to keep your S-Corp in good standing, you must fulfill certain obligations. Here is what you need to know to maintain the integrity of your S-Corp.
S-Corps must first and foremost submit a Form 1120S yearly tax return to the IRS. The company’s income, deductions, and credits are disclosed in this return, which also calculates the tax due. Additionally, shareholders must get a Schedule K-1, which details their portion of the company’s earnings, credits, and deductions. Note that S-Corps do not pay federal income tax; rather, the company’s earnings are passed on to the shareholders for individual taxation at those individuals’ marginal tax rates.
S-Corps are required to hold annual shareholder meetings and keep accurate minutes of those meetings in addition to filing an annual tax return. These gatherings are crucial for choosing the company’s leadership and picking its officers and directors. The S-Corp’s legal status may be in jeopardy if these meetings are not held or adequate minutes are not kept.
S-Corps must also adhere to state and municipal laws, which differ depending on the area. For instance, companies and LLCs in Texas are required to submit an annual report to the Secretary of State along with a filing fee. Corporations must pay $150, whilst LLCs must pay $0.00. S-Corps must also continue to be Texas residents and adhere to all other business regulations set forth by the state.
S-Corps have many advantages over other corporate arrangements, but they can have drawbacks. For instance, S-Corps are restricted to a maximum of 100 stockholders, all of whom must be citizens or residents of the United States, but LLCs give greater flexibility in management and distribution of earnings. S-Corps also have more stringent standards to meet in order to keep their status, including as restrictions on the kinds of stock they can issue and guidelines for dividing earnings and losses among shareholders.
Last but not least, some business owners might be considering moving to a state with no taxes in order to pay less in taxes. The seven states without a state income tax are Wyoming, South Dakota, Texas, Florida, Nevada, and Alaska. Remember that even if you relocate to a state where there are no taxes, you can still be liable for federal income tax as well as other taxes and fees.
In conclusion, it is crucial to pay close attention to annual tax filings, shareholder meetings, and local and state regulations in order to preserve an S-Corp. While S-Corps have advantages over other corporate arrangements, such as avoiding double taxation, they also have drawbacks. Before deciding on a business form and location, business owners should carefully weigh their options and speak with a tax expert.
Your Social Security benefits will not be subject to tax in Texas. One of the 37 states that exempt Social Security benefits from taxation is Texas.