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-Corp formation attorney 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 Atlanta business formation attorney.
An S corporation, or S-Corp, is a type of corporation that allows small businesses to avoid the double taxation that is typically associated with traditional corporations. In an S-Corp, the corporation itself does not pay income taxes (as is the case with a C-Corporation). Instead, the profits and losses of the corporation are passed through to the shareholders, who report the income on their personal tax returns. This means that the income is only taxed once, at the individual shareholder level. S-Corps are a popular choice for small business owners because they offer limited liability protection for the shareholders, while also providing potential tax benefits. It is important for small business owners to consult with a qualified Atlanta business formation attorney to determine whether an S-Corp is the best option for their business.
To register as an S Corporation, a company must first incorporate as a standard Corporation or Limited Liability Company (“LLC”) with the state in which they plan to operate. Once the corporation is formed, the business owners must then elect S-Corporation status by filing Form 2553 with the Internal Revenue Service (IRS) within 75 days of incorporation or by the 15th day of the third month of the corporation’s tax year.
In order to qualify for S Corporation status, the corporation must meet a handful of requirements.
While S-Corporations offer several tax advantages, they are subject to tight restrictions that can limit their flexibility and growth potential. For example, S-Corporations are limited to a maximum of 100 shareholders, which can restrict the ability of the business to raise capital and attract new investors. Additionally as mentioned above, S-Corporations typically cannot have non-resident alien shareholders, which can limit their ability to expand globally.
Furthermore, S-Corporations are subject to strict ownership restrictions. All shareholders must be individuals, certain trusts, estates, or tax-exempt organizations, and the corporation can only issue one class of stock. This can limit the ability of the business to offer different types of stock or raise capital by issuing preferred shares or other types of securities. Finally, S Corporations must comply with all regulatory and formal requirements, such as holding annual shareholder meetings, maintaining detailed corporate records, and filing annual tax returns.
Incorporating your business as an S-Corp provides an abundance of benefits.
S-Corps can also be attractive to investors, as they offer the potential for growth and increased profits while maintaining a flexible corporate structure. Overall, S-Corps can provide many advantages for small to mid-sized businesses looking to maximize tax savings and protect shareholders.
S-Corps offer limited liability protection for shareholders, meaning that they are not personally responsible for the company’s debts and liabilities, so long as the corporate formation laws are complied with—if you have any doubt, check with an S-Corp formation attorney.
An S-Corp designation allows for special tax treatment under the U.S. tax code. Given S-Corps are considered “pass-through” entities, this can result in significant tax savings compared to traditional corporations. For example, with a typical C Corporation, $100 in profits would be taxed at around 20% (leaving $80 from the initial $100 in profits). Then, the remaining $80 would be taxable income against the shareholder on their individual tax return as well. If the individual has a 30% tax rate, that leaves only $56 out of the starting $100. If that same shareholder-owned a pass through entity, an S Corporation, their 30% tax would only happen once, on the individual level, leaving the shareholder with $70 after paying taxes. The net difference in this example is a whopping 14%!
In addition to the pass-through tax structure, S-Corps offer other financial advantages that make them an attractive option for business owners. S-Corps can deduct certain expenses, such as health insurance premiums for employees, which can reduce the overall tax liability for the company. This deduction is not available to other types of entities, such as sole proprietorships or partnerships.
As with any business entity, S-Corps have certain duties and responsibilities that they must establish and follow—this is best done by a trusted Atlanta S-Corp formation attorney. These include maintaining accurate financial records, holding regular board meetings and keeping minutes of those meetings, filing all necessary tax returns, and complying with all applicable laws and regulations. S-Corps should also have a clear structure for decision-making and management, outlining the roles and responsibilities of officers and directors. It is important for S-Corps to have a set of bylaws that outline these duties and responsibilities and to adhere to them in order to maintain their status as an S-Corp and avoid any legal or financial issues.
Several factors can affect S-Corps in Atlanta, such as Atlanta’s local economic climate, tax laws, real estate, and regulatory changes. Atlanta has a diverse and growing economy, with a strong focus on technology and innovation, which provides special opportunities for S-Corps in these sectors. However, the city also faces challenges such as competition, increasing costs of doing business, and changing real estate that can impact the success of S-Corps.
Tax laws and regulations can also have a significant impact on S-Corps in Atlanta. Georgia has a relatively low corporate tax rate of 5.75%, which can be advantageous for S-Corps. However, there are also state and local taxes and fees to consider, as well as federal tax laws that can affect S-Corp owners. Additionally, regulatory requirements such as licensing and permitting can be complex and time-consuming, making it important for S-Corps to stay up-to-date on all relevant laws and regulations to avoid any penalties or fines.
At Sparks Law, we have a wealth of experience and knowledge in helping small and medium-sized businesses in Atlanta navigate the complex world of S-Corp formation and compliance. Our team of Atlanta S-Corp formation attorneys understands the unique challenges and opportunities facing businesses in this city and can provide tailored solutions to help your business thrive.
Whether you are just starting out or looking to grow your existing S-Corp, we can help you with everything from entity formation and bylaw creation to tax planning and compliance. Our focus is on building long-term relationships with our clients, providing personalized and responsive service, and helping businesses achieve their goals. If you are looking for an experienced and dedicated Atlanta S-Corp formation attorney, look no further than Sparks Law. Contact us today to learn more about how we can help your business succeed.