Why Should I incorporate my business using an S-Corporation?
July 20, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO - The question of “why should I incorporate my business” involves numerous issues and considerations that require some careful evaluation. This article will focus on the benefits of utilizing Section §1362 of the Internal Revenue Code; formation of an “S” Corporation.

In short there are numerous advantages to using an “S” corporation over sole proprietorship. To begin, an S corporation is a “pass-through” entity and profits distributed to the shareholders are not subject to the imposition of self-employment taxes. This remains one of the most significant advantages of using this entity to conduct your business.

For example a business owner filing Schedule C with $60,000 in taxable profits would reduce taxes by nearly $8,000 per year simply operating as an “S” corporation, and following other reporting requirements.

In addition, the corporation pays no corporate taxes (with very limited exceptions) on its profits or earnings; thus unlike a traditional “C” corporation the issue of double-taxation is eliminated for this entity as well.

In short, the use of an “S” corporation makes a great deal of practical sense, provides a clear reduction in the amount of total taxes a business owner might be required to pay; and can also provide numerous legal protections. (Consult an attorney who is experienced in these legal issues: SODEN & STIENBERGER of San Diego (619) 239-3200 is a local firm who can provide advice in this area.)

How do I form an “S” corporation? – First, seek the advice of a professional who is experienced in all of the numerous tax laws, reporting requirements, and strategies before forming your corporation. Do not use internet based do-it-yourself formation services as they lack any of the basic support necessary to properly implement, design, and operate this entity form; and in most cases could cost you far more in fees to clean up the potential problems that could arise.

You should have a clear understanding of why you are opting to use this entity; how you will operate it; and all of the formalities that may be required to protect the tax and legal structure created.

For more information contact Tax Smart America, a San Diego based firm who specializes in the formation, compliance, and operational issues in taxation surrounding “S” corporations. They can be reached at (619) 469-5800 for a free consultation.