An Overview on Subchapter S Corporations Law
Pros and cons of choosing this legal structure for your business
on December 15, 2016
Updated on April 13, 2020
When you are setting up a business, you have different options for the legal structure, all of which will offer you different tax benefits and drawbacks. One popular option is found in Subchapter S of the Internal Revenue Code (IRS).
If you are considering taking advantage of this subchapter’s tax benefits, you might find it helpful to speak with an experienced lawyer. The following is an overview of S corporations so you feel confident speaking with a lawyer.
An S corporation is a corporation that is taxed under subchapter S of the IRS. Not every corporation can take advantage of this subchapter, and there are some benefits and drawbacks to forming an S corp.
The basics of forming an S corp are essentially the same as forming any corporation. You will need to choose a name and file articles of incorporation with your state. Once you are incorporated, you can issue stocks to your shareholders and apply for any identification numbers your state requires, like tax ID numbers. Finally, you will need to file required forms with the IRS.
There are some special requirements to make sure you follow if you want to fall under this subchapter:
- You must have a domestic corporation, which requires that you be a United States citizen
- You cannot have more than 100 shareholders
- Your corporation must issue only one class of stock
Pros and Cons
If you are considering creating an S corp, you will want to consider the benefits and drawbacks. Subchapter S gives you the benefits of a corporation while taxing you like a partnership. It provides limited liability protections to shareholders, and money is not taxed twice as corporate income and dividend income. The subchapter creates a system of taxation where owners report their profit and losses on their individual taxes and pay them at that rate.
Because of the tax benefits of this type of corporation, you may be subject to more IRS scrutiny. This might mean being subjected to more audits of your returns to make sure you are following the requirements, including the small number of shareholders allowed and how you are distributing payments to shareholders.
Below are some common questions you might want to consider when meeting with an attorney for the first time.
- What is the difference between an S corp and an LLC?
- What identification numbers do I need to apply for?
- How do I file articles of incorporation?
Finding the Right Attorney for Your Needs
It is important to approach the right type of attorney—someone who can help you through your entire case. To do so, you can visit the Super Lawyers directory, and use the search box to find a lawyer based on your legal issue or location.
To help you get started, you may want to consider looking for a business organization lawyer.
Why Should I Talk to a Lawyer?
Subchapter S has strict requirements and increased scrutiny, so it is important to make sure you set up your corporation correctly. The Internal Revenue Code can be hard to understand and there are consequences for misunderstanding it, and your lawyer will understand the code and how it affects your business plans.
A lawyer will further be able to anticipate potential problems with your plans and advise you on how to approach them, and they will also keep track of deadlines and file all the paperwork with the necessary courts and agencies—giving you one less thing to worry about.
Why Super Lawyers?
Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high degree of peer recognition and professional achievement. The patented selection process includes independent research, peer nominations and peer evaluations. The objective is to create a credible, comprehensive and diverse listing of outstanding attorneys that can be used as a resource for attorneys and consumers searching for legal counsel. As Super Lawyers is intended to be used as an aid in selecting a lawyer, we limit the lawyer ratings to those who can be hired and retained by the public. You can learn more about the selection process here.