If you have decided to charter your new company as a Georgia corporation, congratulations! Before you file the paperwork with the Secretary of State, you should consider a special tax designation called an S corporation. The Internal Revenue Service (IRS) allows this classification if your company meets specific criteria.
Corporations under the law have a distinct life of their own, separate from shareholders. They can incur debt that shareholders are generally not responsible for repaying. They can accumulate assets, sue, and be sued. As a knowledgeable attorney could explain, an S corporation can also benefit shareholders by passing profits to them with a tax structure mimicking a limited liability company. At Sparks Law, a Johns Creek S corporations lawyer could review your business goals and determine if the S Corporation structure is right for you.
S corporations offer the benefit of a pass-through tax status to shareholders, thus eliminating double taxation at the corporate and personal levels. S corporations are exempt from federal income taxes because profits are passed to shareholders and disclosed on personal tax returns.
Shareholders can declare their share of the company’s losses up to their cost basis to offset personal income, although some adjustments may be required. A Johns Creek attorney could guide a business owner through the tax process for S corporations.
When an incorporator charters a corporation, the company is a C corporation by default unless they select the S corporation designation. However, there are some requirements for a company to qualify. Restrictions on Georgia S corporations include the following:
S corporations are restricted in the type of income they can generate. Only 25 percent of gross income may be passive, where owners expend little or no effort to earn it. This would include rental property income and limited partnerships, which are taxed differently by the IRS. A lawyer at our firm can help determine if a company qualifies for S corporation designation and if that designation would be beneficial.
Because they are legal entities outside their owners, both S and C corporations can be subject to lawsuits that will not affect shareholders, directors, or officers unless they act in bad faith. Although shareholders will lose their initial investments if the company goes bankrupt, their personal assets are not at risk. When shareholders sell their stock or die, the corporation does not cease to exist as sole proprietorships and partnerships often do.
Corporations should adopt bylaws and hold at least the minimum number of shareholder meetings. The Board of Directors should meet regularly to discuss significant issues, with the corporate secretary taking written minutes that should be kept in the corporate record book.
All Georgia entities must file annual reports between January 1 and April 1, as well as pay a yearly filing fee and an annual franchise tax based on paid-in capital. A diligent attorney at our Johns Creek office could make sure that an S corporation’s filings comply with state laws.
If you plan to remain a close corporation, there are many advantages of the S corporation status. The limited number of owners have more control than those in a C corporation, and the profits are only taxed once.
Speak with a Johns Creek S corporations lawyer at Sparks Law to discuss whether this classification is in your best interests. Call our office today to schedule a consultation.