If you have decided to charter your business as a corporation, you must make an important decision. Your company can remain a C Corporation, the default designation under Georgia law, or you can opt to become an S Corporation. The latter is a designation by the Internal Revenue Service (IRS) that has unique tax benefits.
Shareholders in any type of corporation are shielded from liability for corporate debt and lawsuits because Georgia recognizes corporations as separate from their owners. What makes an S Corporation different is its pass-through tax structure. An Atlanta S Corporations lawyer could assess your situation and determine if this designation is the best choice for your business. Call Sparks Law today to speak with an experienced business attorney.
A business must meet specific criteria to operate as an S Corporation. Owners who intend to grow their business through equity are not good candidates for this designation, nor are companies that will become publicly traded. Some restrictions that are placed on S Corporations in Georgia include the following:
Additionally, an S Corporation must limit its passive income to 25 percent of gross income. Passive income occurs when owners are not putting an active effort into generating income, such as owning rental properties or limited partnerships instead of manufacturing and marketing a product. The IRS usually taxes passive income differently. A lawyer experienced in Atlanta S Corporations could pinpoint a client’s passive income to ensure it does not exceed the IRS maximum.
Shareholders for a Georgia S Corporation do not have to live in the state. Still, they do have to report income and pay Georgia state income tax when they receive a share of the company’s profits, according to the Georgia Department of Revenue.
Shareholders who do not live in Georgia must submit Form 600 S-CA, agreeing to pay Georgia taxes. A local attorney at Sparks Law could review an S Corporation’s books to make sure accurate shareholder records are kept and pertinent documents are filed with the state and the IRS.
S Corporations do not pay federal income taxes as C Corporations do. Shareholders report profits and losses on their personal income taxes, which means the income is only taxed once, and taxes are based on the lower federal personal tax rate rather than the corporate rate. Shareholders can also deduct their share of the S Corporation’s losses up to the amount they have invested in the company, known as their cost basis. Some adjustments may apply, which a knowledgeable S Corporations attorney could further explain.
Along with their limited liability for corporate debt and judgments, shareholders do not lose personal assets if the company goes bankrupt, although they will lose their initial investment. The S Corporation maintains a life of its own when shareholders die or sell their stock, which is a significant problem for sole proprietorships and partnerships.
All corporations should adopt bylaws for managing the business. Directors and shareholders should conduct regular meetings, which the corporate secretary should document. Georgia requires S Corporations to file annual reports each year before April 1, along with an annual filing fee and franchise tax affiliated with paid-in capital. A skilled lawyer at our Atlanta office can oversee this filing process for S Corporations in the area.
If you prefer a corporate status for your business and intend to take on limited shareholders, an S Corporation status may be for you. The pass-through tax status can save you money, and your shareholders, directors, and officers are protected from corporate judgments and debt repayment.
Before you make this decision, discuss with an Atlanta S Corporations lawyer at Sparks Law. Our attorneys can discuss your business goals and determine an effective strategy to achieve them. Call us today for an initial consultation with a skilled member of our team.