Home Business: S Corporation

There are three main options for a small home business: LLC, sole proprietorship and S Corporation. Each of these has its own advantages and disadvantages, and which is best for you depends a great deal on the situation of your home business, and what you plan to do with it. The sole proprietorship has the fewest tax benefits, and for me, the LLC is the best choice, since I don't have any employees and I don't plan to issue stock. But if you want to put together a company that does issue stock, and you want to leave the way open for growth with employees, you might consider an S Corporation.

S Corporation

An S Corporation is what is known as a "pass through" entity (an LLC is also a pass through company). This means that distributions to partners and shareholders are not taxed in terms of payroll taxes. (You should consult someone about state taxes.) However, if you have a payroll and employees, you will need to pay FICA taxes (payroll taxes) on wages to employees. But distributions to shareholders are not taxed with FICA.

It is important to note that there is a little more when it comes to setting up an S Corporation. This is because you also have to set up payroll. This is necessary. It helps to have an accountant get you set up in this arrangement so that you can figure out a cash flow and have everything properly explained to you. With an LLC, a payroll isn't necessary if you don't have employees.

Additionally, all of the stock issued to shareholders by an S Corporation has to be the same kind. And there are requirements as to when election of officers, etc. must be held. Additionally, there may be some state requirements for state level S Corporation elections. Remember: whenever you do things with taxes for your home business, you have to consider state, as well as federal, taxes. Many people forget the state aspect and impact of their decisions.

Converting from a C Corporation to an S Corporation

If you already have a C Corporation can convert to an S Corporation in order to take advantages of the specific tax benefits. It is important to consult with a knowledgeable tax attorney or with an accountant when you make this conversion, since some tax issues may need to be resolved.

Before deciding what would work best for you, carefully consider your options.

Disclaimer: I am not a tax professional. Consult with a tax professional or an accountant before making business-related tax decisions.