Forming a business entity is a personal decision that depends heavily on the unique combination of the owners, investors, nature of the business and specific business and financial objectives. There is no single cookie-cutter answer to which type of business entity will be best in any given situation.
The “S-Corp” is not actually an entity type at all. Business entities are formed at the State level and an S-Corp is a creature of federal tax regulations. The “S” in S-Corp refers to a choice that a regular corporation makes to be taxed under Subchapter S of the Internal Revenue Code. This S-Corp status is granted by the IRS provided the business meets and maintains certain criteria and is subject to certain limitations on number of shareholders, the identity of the shareholders, how many classes of stock and other matters.
The primary advantage of the S-Corp election is that the business entity becomes a “pass though” for Federal tax purposes. That means that income and expenses that would normally be assessed by the Federal government on the corporation are instead taxed to the shareholders individually, not to the corporation, thus avoiding the ‘double taxation’ normally associated with corporations.
In Nevada, to form an S-Corp you would:
- Form a regular Nevada Corporation under NRS Chapter 78 and register the corporation with the Nevada Secretary of State.
- As a second, and completely separate step you would need to make the “S-Corp election” by filing with the IRS.
- You will also want to ensure that the decision to be taxed under Subchapter S has been raised at a meeting of the Shareholders, properly voted on and recorded in the minutes of the organization. Additionally you will want to make sure that the by-laws of the organization are in compliance with S-Corp restrictions on number of shareholders, classes of stock and ownership requirements among other things.
It is important to note that the S-Corp is created entirely by the federal tax code and this is an area of the law that is constantly changing. The advantages that you get today from an S-Corp election may not exist tomorrow. You should always seek the advice of a qualified accountant as well as a Nevada business lawyer before making any decisions related to choice of business entity.Tags: tax, starting a business, llc, how-to, s-corp