If you are planning to open a small business or operate one as a sole proprietorship or partnership, you should consider incorporating your business. An S corporation is ideal for a small business as it provides pass-through tax status for its shareholders and, in most cases, protects its shareholders from personal liability for business debts and obligations. One person is all that is needed to form S corporation.
An S corporation is formed when articles of incorporation are filed with the secretary of state. After the corporation completes the statutory filing requirements, the corporate organizers must elect directors and appoint officers. One person may be both an officer and a director. In fact, one person may hold more than one office in the corporation. However, corporate formalities must be observed to ensure that the business maintains legal corporate status.
Once the board is elected, by-laws must be prepared and adopted by the board of directors, and shares of stock must be issued. The board of directors manages the corporation; the officers manage the day-to-day operation of the business. The decisions and actions of the officers bind the corporation.
The corporation is owned by the shareholders in proportion to the amount of stock held by each person. Shareholders, unless they are also officers, do not participate in the day-to-day operation of the corporation. Ownership interests in the corporate business are easily transferred or created by the sale of stock. Thus, it is relatively easy to bring in new capital or owners after the corporation has been formed.
Because a corporation is a legal entity separate and distinct from its officers, directors and shareholders, its existence is not terminated by the withdrawal, death, or other event affecting its officers, directors or shareholders. Thus, the business may continue to operate under circumstances that might put a sole proprietorship or partnership out of business or hinder its operation.
The S corporation also provides tax advantages for its owners. The corporation is eligible for “pass-through” tax status. When such an election is made, the corporation does not pay income taxes. The shareholders report their share of the corporation’s income, deductions, losses, and credits on their personal federal and state tax returns.
Consult with your accountant and attorney to determine if an S corporation is the right form for your business.
For further information or to schedule an appointment, call Joyce Helock at 661-414-7123.