“S Elections” for Small Businesses

We are currently seeing an increase in interest from clients in making an “S Election” for their businesses. An S Election is a tax election, made through the Internal Revenue Service, to be taxed as a partnership under the rules of Subchapter S of the Internal Revenue Code.

To make an S Election, your business must meet a few requirements: (1) it must be a domestic United States corporation with no foreign investors; (2) it must have no more than one hundred shareholders; (3) it can only have one class of stock; and (4) it must use a December 31st year end.

A common misconception is that you must be a corporation to make an S Election; however, limited liability companies (LLCs) may also make an S Election.

There can be several advantages to making an S Election for your business. Primarily, making an S Election may provide tax savings to the owners by permitting some or all of the business profits to avoid self-employment taxes. In addition, as a pass-through tax structure, owners of a business making an S Election may be entitled to deduct up to 20% of the income of the business using the Qualified Business Income Deduction.

Tax savings are always great, but there can be disadvantages to making an S Election. A significant disadvantage is that it does not allow for flexibility regarding profit and loss allocation. For example, with an LLC, you are able to allocate profits and losses in whatever manner the owners agree. However, with an S Election, the owners can only be allocated profits and losses based on their ownership interest.

If you are considering making a S election, you should speak with your attorney and accountant. You can get started by setting up a consultation at http://www.hilllawpllc.co today.

NOTE: This post is for informational purposes only. No attorney-client relationship has been formed.