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The S Corp Election Deadline is March 15th. What you need to know. by @CorpNetNellie

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by Nellie Akalp

Your LLC or corporation could receive better tax benefits by electing to file as an S Corp. However, with the March 15, 2019 deadline quickly approaching, if you want to be taxed as an S Corp for the 2019 tax year, here’s what you need to know.

S Corp 101

S Corps choose to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S Corps then report the income and losses on their personal tax returns, so they’re taxed at their individual income tax rates. You would elect the S Corp structure in order to avoid double taxation on the corporate income. 

To qualify for S Corp status, your business must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
  • May be individuals, certain trusts, and estates and
  • May not be partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have only one class of stock

Because the S Corp isn’t a legal business entity type, just a special election for tax purposes, an S Corp still offers you personal protection from liabilities of debt or lawsuits.

S Corps have some other advantages, such as:

  • They are only required to file once a year 
  • They are not subject to the double taxation of income (once as corporate income and once as dividends)
  • They can sell shares of stock, and 
  • They have perpetual existence, meaning the business continues to exist even if the owner leaves or dies. 

The expenses and paperwork are the same as corporations, such as filing deadlines and expenses related to incorporating and annual fees. You should also consider the limitations on shareholders and stock. Since S Corps are allowed to issue only one class of stock and are limited to 100 shareholders who must be either citizens or permanent residents of the U.S., it may limit your ability to raise capital for the business.

Be forewarned, S Corps tend to attract the attention of the IRS, especially when it comes to salaries and dividend payments to shareholders. If you make any mistakes regarding the filing requirements, you could lose the status of being an S Corp. 

Deadline Approaches

March 15, 2019 is the deadline to file IRS Form 2553 with the IRS to elect S Corporation status for this tax year and future tax years. If you don’t make the March 15 deadline, your business will remain being taxed as a C Corp for the current tax year, and then your S Corp election will be effective for next tax year. 

It is possible to file an extension for S Corp status (IRS Form 7004), but that doesn’t extend shareholders tax deadline which remains April 15. Once the S Corp form has been elected, your company must continue to meet ongoing filing requirements, such as:  

  • Reporting all financial activity on Form 1120S and attaching a Schedule K-1 for each shareholder
  • Withholding federal income tax, Social Security and Medicare taxes from employees’ paychecks (if the company has employees) 
  • Filing IRS Form 941 each quarter to report these withholdings. The form is due four times a year: January 31, April 30, July 31 and October 31. 
  • Filing a Federal Unemployment Tax Return each year using IRS Form 940

Be sure not to miss any filing dates, or you’ll receive a hefty penalty. You could get a pass on paying the penalties if you can show the IRS the failure to file on time was due to a “reasonable cause.” Merely, a lack of funds is not a reasonable cause for failure to file or pay on time. However, the reasons for the lack of funds may be okay.

According to the IRS, reasonable cause is based on all the facts and circumstances in the company’s situation. If your company used all “ordinary business care and prudence” to meet your federal tax obligations, but were unable to do so, this will be considered reasonable cause. Situations such as fire, casualty, natural disasters, the inability to obtain records or death, serious illness, or incapacitation of the taxpayer or a member of the taxpayer’s immediate family would meet the criteria.

Talk to your accountant to see if the S Corp election is a smart choice for your business and then let CorpNet take care of the filing for you.

What’s the difference between an S-Corporation and a C-Corporation? by @DeborahSweeney

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What's the difference between an S-Corporation and a C-Corporation?

by Deborah Sweeney  | Featured Contributor

For all the new small business owners out there deciding which entity to file their business as, and the already-formed corporations thinking about tacking on a different election, this is the post for you. Choosing the right entity for your business is a huge enough deal, weighing the pros and cons of all the different elections is another entirely different ball game. Basically, there’s a lot to research when you start a business.

First of all, how exactly does one define a regular Corporation?

A corporation is an independent legal and tax entity, that’s legally separate from the people who own, control and manage it. Because of this separation, the owners of a corporation don’t use their personal tax returns to pay tax on corporate profits—the corporation itself pays these taxes.

Owners pay personal income tax only on money they draw from the corporation in the form of salaries, bonuses, and the like.

The C-Corporation

A C-Corporation is the most general type of corporation you can have. The owners of a C-Corporation are mostly protected from personal liability for business debts, although, if the corporation doesn’t follow the formalities of a corporation, there can be problems with personal liability. As a result, the formalities such as filing annual reports, maintaining separate bank accounts, keeping track of meeting minutes, and holding shareholders meetings are very important.

A huge benefit of owning a C-Corporation is that the owners can share corporate profits with the corporation, lowering the overall tax rate. A C-Corporation can also have an unlimited number of shareholders. Plus, if you wish to take your company public (selling shares over a public trade), you will definitely need to be in a C-Corporation, so starting out as one saves you some time and trouble down the road.

The S-Corporation 

An S-Corporation is a C-Corporation that has elected to be treated as an S-Corporation. It has the same personal liability protection and potential issues as a C-Corp, but it also comes along with some very precise formalities. An S-Corporation can only have a certain amount of shareholders and the shareholders must meet specific requirements. An S-Corporation also allows for corporate profit sharing, but the allocations must be done in accordance with the shares each owner owns. A benefit to this is that owners can use any losses of the corporation on their personal income tax returns, reducing personal tax liability in many instances.

In an S-Corporation, all business profits “pass through” to the owners, who report them on their personal tax returns. The S-Corporation itself does not pay any income tax.

Therefore, an S-Corporation elects not to be taxed as a corporation. After the corporation has been formed, it may elect “S-Corporation Status” by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well).

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Deborah Sweeney – Legal Expert, CEO, MyCorporation.com – Calabasas, CA

Deborah Sweeney HeadshotAs CEO of MyCorporation Business Services, Inc. (MyCorporation.com), Deborah Sweeney is an advocate for protecting personal and business assets for business owners and entrepreneurs. With her experience in the fields of corporate and intellectual property law, Deborah has evolved from lawyer to business owner. She has extensive experience in the start-up and entrepreneurial industry as she has been involved in the formation of hundreds of thousands of businesses for MyCorporation.com’s customers.

Ms. Sweeney received her JD & MBA degrees from Pepperdine University. She is active in the community and loves working with students and aspiring entrepreneurs. She serves on the Board of Regents at California Lutheran University and is a founding member of Partners of Pepperdine. Deborah has served as an adjunct professor at the University of West Los Angeles and San Fernando School of Law in the areas of corporate and intellectual property law. Ms. Sweeney is also well-recognized for her written work online as a contributing writer with top business and entrepreneurial blogging sites.  She is a regular contributor on Forbes, American Express, Social Media Today, and BlogHer among many others.

In her ‘free’ time, Deborah enjoys spending time with her husband and two sons, Benjamin (8) and Christopher (6). Deborah believes in the importance of family and credits the entrepreneurial business model for giving her the flexibility to enjoy both a career and motherhood. Follow her on Twitter @deborahsweeney and @mycorporation.

Your Top 5 Small Business Law Questions Answered by @RachRodgersEsq

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by Rachel Rodgers | Featured Contributor

So you’ve been in business for a while now and you’re starting to really see the fruits of your labor. You’ve got a great set of clients or customers, steady business growth and new opportunities on the horizon. One thing you haven’t got together is the legal stuff.

Its great to reach the beautiful place in your business when your plans are actually working, but you won’t be there for long or go much further if you don’t handle your legal business. You need to make sure that your businesses legal needs are covered to protect your revenue stream, save money on taxes, avoid possible lawsuits and prevent others from stealing your intellectual property and ideas.

Don’t worry. I’m here to help you do just that by answering your top 5 small business law questions. Understanding the legal needs of your business is the first step towards taking care of those needs.

 How do I know which entity is right for my business?

Whether or not you’ve formally formed a business entity, you do have one. Sole proprietorships spring into being, without filing any legal documents, the moment you start selling something. General Partnerships also spring into being when one or more persons begin working on a business together. There are a myriad of pluses and minuses attached to each business entity which may include: increased or lowered taxes, shielding of your personal assets from creditors and even your partner’s ability to acquire debt in your name. This is not something that a quick visit to LegalZoom.com can fix. You will want to consult with your attorney and accountant to determine which entity is the best fit for you and your business.

Even if you formed a business entity back when you started your business, such as an LLC or S-Corp, if you have hired employees, seen a significant increase in revenue or experienced other major changes in your business since then, it’s time to reconsider your business structure. Having the wrong business entity can mean paying more taxes and having less protection for your personal assets.

What contracts do I need to protect my business?

There are two main contracts that every business needs. The first contract is the agreement that governs your relationship with your clients or customers. This may be called a Client Service Agreement or Terms and Conditions. The benefit of this contract is that it makes sure that everyone involved in the agreement understands exactly what is going to happen, what is going to be exchanged (services, products), and what happens if something fails. Essentially it puts everyone on the same page.

The second contract you want to make sure you have is the Independent Contractor Agreement. Many small businesses rely on independent contractors to support them in their small businesses. Whether its a customer service representative or high level consultant, you need to have an Independent Contractor Agreement to govern that relationship. This is not only to manage the expectations of the parties involved but also to protect you from the IRS, who could choose to classify your contractors as employees triggering employment taxes and possibly penalties.

Do I have to have a privacy policy on my website?

You may be wondering why so many companies have a privacy policy on their website and whether you should have one as well. There are state laws such as the California Online Privacy Protection Act (COPPA) that require website owners who collect ANY sort of information from their website visitors to have a privacy policy on their website. When you collect an email address, comments to blog post entries or other private information from visitors you are required to inform these visitors of what you will do with their information once collected. So its important that every website owner maintain an up to date privacy policy on their website.

Why should I register the trademark for my business?

The longer you are in business the more intellectual property your business produces and the greater the value of that property. Things like logos, slogans, apps, e-books, classes, written works and visual designs are some of your businesses money-makers and identifiers of your brand. It’s important to take steps to protect those company assets. Trademark your company name, logo and slogan to ensure your company has national rights (rather than just local rights) to each of its brand elements and to prevent copycatters from unjustly benefiting from the brand recognition you’ve built up. Not to mention, your trademarks are a business asset that can increase the overall value of your company.

Do I need a lawyer and if so, how do I find a lawyer I can afford?

Having a lawyer means you can take advantage of opportunities to work with others, position your company to obtain financing and avoid trying to handle your own legal needs, which can be a major time suck (and sometimes lead to disastrous results).

Its one thing to know that your business has a better chance of thriving if you have a lawyer on your team. Its another to actually come up with the money to pay a lawyer. Its no secret that lawyers tend to be expensive, especially for a bootstrapping business. However, there are innovative lawyers using creative methods to provide accessible legal counsel for businesses from monthly payment plans for a package of services to assisted DIY.

So don’t sell yourself or your business short. Once you’re business is generating revenue, supporting you, your family and your dreams, you and your business deserve to be protected. Don’t risk losing all or even some of your hard work, creativity and money. Your business deserves better than that.

Disclaimer: This article is a resource guide for educational and informational purposes only and should not take the place of hiring an attorney. No information in this article creates an attorney-client relationship between the reader and the author.

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Rachel Rodgers – Intellectual Property Strategy & Legal Counsel for Digital Entrepreneurs

Rachel RodgersRachel Rodgers is the intellectual property and business lawyer for digital entrepreneurs. Her one-of-a-kind practice, Rachel Rodgers Law Office, is run entirely online making her services accessible and convenient for tech startups, online-based businesses and thought leaders. Her secure online law office was one of the first of its kind and has filled a void among entrepreneurs in need of savvy legal counsel without breaking the bank or compromising excellent customer service. Rachel and her practice have been featured in Fast Company, MSNBC, The Washington Post, Forbes and various other media outlets and publications.

Rachel co-wrote the most entertaining business law guide for entrepreneurs called Small Business Bodyguard: Cover Your Bases, Cover Your Assets, Cover Your Ass. It has been called “fun and engaging” by New York Times bestselling author Chris Brogan.

Prior to forming her law practice, Rachel served as Judicial Law Clerk to the Honorable James A. Farber in New Jersey Superior Court. Before law school, Rachel worked for non-profits in New York, at a premier lobbying firm in Washington, D.C. and on Capitol Hill in the Senate office of Hillary Rodham Clinton.

At home, Rachel can be found baking in the kitchen, running after her two-year-old daughter, feeding her infant son (because who knew such a small person could eat so much?!), hanging out with her hubby, or planning her next trip to France, her absolute favorite place on the face of the planet.

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Why Are LLCs So Popular? by @DeborahSweeney

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By: Deborah Sweeney, CEO of MyCorporation.com

Back in 2010, Assistant Professor of Law Rodney D. Chrisman published ‘LLCs are the New King of the Hill,’ a groundbreaking study on the popularity and growth of the limited liability company, in the Fordham Journal of Corporate and Financial Law. The LLC structure is relatively novel in the world of business law and, as is pointed in the article, was a bit obscure in the nineties. However, Professor Chrisman’s research showed that, by 2007, LLCs were being formed at a much faster rate than any other business structure, outpacing corporations by a margin of nearly two-to-one. What fueled this meteoric rise? And why, of the various business structures available, are limited liability companies preferred by so many new businesses?

Protection

Many small businesses start out as sole proprietorships or, in some cases, partnerships. Once you file for a doing business as name, an EIN, and all of necessary licenses and permits, you’re pretty much ready to do business. The trouble is the business is then inextricably tied to you, or you and your partner if you have one. You are the business, and though you may be selling services or products under a different name, the business, its debts, its profits, and its liabilities are all yours. Traditionally, you would separate the business from yourself by forming a corporation. This turned the business into its own legal entity, which you then helped run. The business held its own debts, was paid a wage, and was taxed separately. In return, the business owner was afforded some protection in case the company went under or was sued. The LLC structure was not widely recognized until the late 1980’s, but once states began adopting LLC-related legislation, many business owners saw a golden opportunity. Forming an LLC afforded the owner, or owners, legal and fiscal protection without being as complicated or as expensive as a corporation.

Taxes

Corporations often fall victim to ‘double taxation’ – most states have a corporate tax rate that is levied against a corporation’s profits, and then shareholders have to pay personal taxes on whatever income they derived from the corporation. There is, however, something called an S-Corporation, which allows for the flow of profits through the business directly to the shareholders, thus avoiding the corporate tax. Unfortunately, an S-Corporation requires that you form a C-Corporation first. They can also be difficult to maintain and are subject to a litany of laws and regulations. An LLC, on the other hand, has a pass-through structure by default – and if, for whatever reason, the members don’t like that structure, they can also choose a different way to be taxed.

Simplicity

As was mentioned above, running a limited liability company is much simpler than running a corporation. There are no annual shareholder or member meetings, unless an operating says otherwise, and some states even allow LLCs to be set up with only one member. Regulations vary from state to state, but for the most part all you need is a well-kept record of major business decisions and a spreadsheet laying out the company’s finances. Most states also require LLCs to send in an annual report with updated information on the names and addresses of an LLC’s members and to pay a fee. Compared to the records you have to maintain in order to properly run a corporation, an LLC is a much, much simpler structure.

Some states are still trying to fully grasp what an LLC is, and what kind of protection it affords its members. But, for the most part, the LLC has become an accepted, respected, regulated legal structure, and small businesses all across the United States have chosen to form an LLC to take full advantage of the protection it affords them. LLCs will, undoubtedly, continue to be one of the most popular business structures barring a serious reform of corporate law thanks to the structure’s simplicity, its ability to shield its members, and its tax structure.

Photo Credit: Cavan Images via Compfight cc

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About the Author:

Deborah Sweeney HeadshotDeborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.