If you’re looking to save on your business taxes and want an easier way to raise capital, consider filing as an S Corp.
The S Corp designation is beneficial for many, but that doesn’t mean it works for every business owner. It’s good to know the pros and cons of this type of small business to figure out if it’s the best one for you.
One of the first things to know about starting a corporation is that it’s a C Corporation by default until you file the right paperwork to make it an S Corp.
An S Corp isn’t the same as corporation or limited liability company (LLC) business entities. It’s actually a tax election approved by the Internal Revenue Service (IRS). If you choose to file for S Corp tax status, you can avoid what’s called “double taxation.” This is where Arizona C Corporations pay taxes at both the business and shareholder level.
Instead, selecting the S Corp tax status lets you take advantage of something call “pass through taxation.” Pass through taxation is where your business can pass on to your corporation shareholders all your business profits, deductions, losses, and credits. The shareholders then pay any liabilities on their personal income tax.
It can be both exciting and overwhelming to start a new business. We are here to support you throughout the entire process with tools and services designed to make starting and running a business easier.
Before you file as an S corp, you’ll need to form your Arizona LLC or corporation with the Arizona Corporation Commission first. We can help you both decide if an S Corp is right for you and walk you through filing as an Arizona S Corporation. Here are the six steps to forming your business in Arizona:
Your business name goes on your official filings and can help you attract patrons. When you form a corporation or LLC, you need to choose a name that’s distinguishable from other names on file with the state. Also, your business’s name needs to identify whether it’s a corporation or LLC.
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To keep your Arizona S Corporation legally compliant, you need to have a statutory agent. Your statutory agent is responsible for accepting legal documents and official correspondence for your business. Some states call this a “registered agent.”
If you’re having a hard time locating a good statutory agent, our Registered Agent Service is here to help you get it done fast. Our Registered Agent Service performs all of the same duties as a statutory agent, ensuring your business stays legally compliant.
A corporation needs a Board of Directors, and an LLC needs one or more managers. These are the individuals who handle your business affairs. If you start an LLC, your members can be your managers, or you can select managers who are separate from the members.
Electing to run an S Corp requires filing a lot of paperwork, including filing paperwork with the state. If you start your business as an Arizona business corporation, you need to file Articles of Incorporation with the ACC. If you start your business as an Arizona LLC, you need to file Articles of Organization with the ACC. You’ll also pay a fee when filing these documents.
Many Arizona state businesses have to publish their Articles of Incorporation/Organization in an appropriate newspaper within 60 days of the ACC approving or filing the business formation documents. To comply with this filing requirement, some businesses have to publish these formation documents multiple times.
You can turn your C Corporation or LLC into an S Corporation by filing Form 2553 with the IRS. If you start your business as an LLC, you need to file Form 8832 to designate it as a corporation before you can file Form 2553.
S Corporations can be easier to run than other entities, but they’re not without their own complexities and potential drawbacks. The IRS requires your business to fulfill certain requirements before you can run an S Corporation in Arizona. Your business must:
If you’re looking to build lots of capital through a large shareholder base, an S Corp might not be the entity for you, but it’s a good idea to speak to legal and financial professionals about your best business options.
Are the tax advantages of having S Corp status right for your business? This decision is dependent on your circumstances, but we can give you some factors to consider.
Running your business as an S Corp can be beneficial in many ways, such as:
If one of your biggest concerns about choosing the right business structure is your amount of tax liabilities, an S Corp might be the right selection for you.
There can also be drawbacks to an S Corp. This depends on who you are and the type of business you have. Some of the disadvantages of S Corps include:
Once again, we encourage you to seek professional tax or legal services to determine if these factors are significant in the face of your specific needs.
Just because the S Corp designation is beneficial for many doesn’t mean it works for every business owner. It’s good to know the pros and cons of this tax election to figure out if it’s the best for you. One of the first things to know about starting a corporation is that it’s a C Corporation by default until you file the right paperwork and follow the right rules to make it an S Corp.
C Corporations can issue more shares of stock and more classes of stock than S Corporations, but for many, that’s not the most significant difference. A big difference and big draw for many who elect S Corp tax status is how S Corporations pay income taxes.
Unlike S Corporations, other corporations pay income tax twice: first on the corporation’s profits, and then again on the individual C Corporation shareholders’ passive income earnings. However, with S Corp tax status, the corporation’s profits are taxed once. Any tax liability is paid by corporation shareholders on their personal income tax returns.
Yes! An LLC can elect to be an S Corporation. This can be great news for many because starting an LLC often requires fewer formalities than starting a corporation. So, if LLCs are so easy to start, what’s the point of choosing the S Corp qualification? Choosing to tax your LLC as an S Corporation could reduce some of your tax liabilities. Learn more about LLCs and taxation on our Tax Information for Limited Liability Companies page.
Sometimes, the largest battle in running a successful business is getting started. If you’re looking to start an Arizona business as an S Corporation, our S Corporation Service can give you the tools to do it quickly and accurately. Our mission is to support entrepreneurs from start to finish.
If an S Corp isn’t the right business structure for you, our Arizona LLC Formation Service and our Arizona Corporation Formation Service can help you with the first steps of getting your business off the ground. Once you’ve started your establishment, we can continue to support you with our numerous business development and maintenance services. Our mission is to support entrepreneurs from start to finish. You can look to us for help if you need assistance with the formation, maintenance, or compliance needs of your enterprise.
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Creating an S Corporation can help you avoid double taxation while still giving you protection from personal liability and the option to sell shares of your business.
When naming your business, one of the main Arizona S Corporation requirements is that the name be distinguishable from other names on file with the state. It also needs to contain the appropriate words to designate it as a corporation or LLC. Check with the ACC for more details about naming your Arizona S Corp.
In general, you don’t use versions of the word “corporation” in the name of your LLC. Instead, you identify your LLC as an S Corporation by filing the proper tax returns at the state and federal levels.
The best way to calculate taxes for your S Corporation depends on the characteristics of your business. Speak to a tax professional about what options are best and most appropriate for your circumstances.
You’ll need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corporation status.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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