“S” Stands for Smart: S Corp

There are a lot of choices in Colorado business formation when you start thinking about setting up your company.  One of these is the S Corporation, which has a special tax status from the IRS. For non tax purposes, it is no different than a C Corporation. Yet unlike the C Corp, which has a double layer of tax, an S corporation is taxed on its earnings as a partnership, but only once. Income is taxed at the shareholder level and not at the entity level.  There is no tax on that income until it is distributed to the shareholders. There are some limitations to the S Corp that I’d like to point out:

  • An S corporation may not have over 100 shareholders
  • No shareholder may be a non resident alien of the U.S.
  • There can only be one class of stock
  • Only individuals may be shareholders and not other partnerships, LLCs, or corporations

As you can imagine from these limitations, an S Corp isn’t for everyone. For instance, it may prove unfeasible to the real estate developer or investor.  Funding and expertise are always key to a real estate project and if a part of one’s funding or expertise is available via a potential shareholder who happens to be a corporation or LLC, it is not allowed. Also, the real estate owners may wish to have an arrangement which gives precedence on money distributed out of the company, or a dividend.  This arrangement would not be allowed as it would create a second class of stock.

But in other instances, the S Corp can be a smart Colorado business formation strategy. Especially if you are interested in the tax advantage and having that pass through to you, the owner’s, own personal income tax. If selling your business is a part of your plans, an S corporation could have reduced taxable gains when the business is sold.

The first step to figuring out an option that best fits your business formation strategy is to consult with your business attorney in Colorado.

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