Subchapter S Corporation (S Corp)

April 13, 2021

What is a Subchapter S Corporation (S Corp)?

A Subchapter S corporation, also called an S corp, is a certain sort of corporation; another kind is a Subchapter C corporation. In brief, an S corp provides all the benefits of a corporate business structure while allowing the losses and profits to pass through to the shareholder(s), as in an LLC or partnership.

A corporation is a form of business that is owned by its shareholder(s) and which assumes liability for the activities and financing of their business -- the shareholders can't be held responsible. Being able to change liability from the operator and on the company itself is a significant advantage.

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Eligibility

Businesses can be established by individuals or businesses. A Few of the constraints of an S corp contain:

No more than 100 investors
Just U.S. citizens can be investors
Can only issue common stock

Pros

For several decades, the Subchapter S corporation has been the preferred business structure for small business owners because they provide the liability protection of a company with the pass-through taxation of LLCs and partnerships. Other advantages include:

The Presence of the company does not expire, as an LLC's can
One individual is able to form a Subchapter S corporation
Ownership interests are transferable
Just the salary of an employee are subject to the 15.3percent self-employment tax, additional benefits and bonuses are excluded

Cons

There are disadvantages, too, however, which include:

The requirement to produce and file the exact same paperwork as a Subchapter C corporation, such as Articles of Incorporation, maintaining corporate minutes, scheduling board of director meetings and shareholder meetings, and providing a means for investors to vote on corporate topics.
The extra paperwork and tax filings include some or all of the following on a regular basis:
- Income Tax Return for S Corporation
- K-1: Shareholder's Share of Income, Credit, Deductions
- Form 4625 Depreciation
- Employment Tax Forms
- Form 1040: Individual Income Tax Return
- Program SE: Self-Employment Tax
- Form 1040-ES: Estimated Tax for Individuals
- Types 2553, 941 and 940
Can only issue common stock to investors, which is less desirable to potential investors.

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Operating Expenses

What are Operating Expenses?

Operating expenses are the costs to a company of activities not linked directly with the principal activity of the enterprise. They are the cost of carrying on the day- to-day actions which don't involve sales or production.

How do Running Expenses Work in a Company?

A company, for example a grocery store, incurs operating expenses different from those involved in the principal activity of the shop, which will be selling groceries. The shop keeps an account of the operating expenditures and the list may include such things as:

Rent
Repairs to a building or equipment
Payroll
Travel costs
Pension contributions
Employee benefits like health insurance
Accountancy and legal fees
Property taxes
Utility costs
Office provides
Marketing

There may be such expenses based on the nature of the shop's business. Running costs may add up to a hefty sum and the storeowner should think about all operating expenses prior to entering business. Lots of individuals consider them as costs to the shop before opening the doors and indicate the minimum income that the shop will have to generate in becoming a viable company.

Managing Running Costs of a Small Business

All operating costs will require paying, irrespective of whether the shop is closed or open. The storeowner must also budget for when a store closes over holidays or in case of an emergency like a flood or fire. The storeowner will also need to consider how to decrease the operating costs of the shop without affecting directly on the smooth functioning of the company.

A storeowner may look to decrease operating costs by cutting back on payroll, state cutting sales employees from five to four, with the direct consequence of substantial decrease in salary costs. A drawback to this is that there'll be fewer people promoting, flaws in assisting clients or possibly a need to improve security with fewer eyes on the shop sales area. The store may get rid of business consequently and at times the reduction may outstrip the initial savings of reducing the payroll bill. With there being a limitation on the cutting of operating costs prior to feeling a negative impact, the shop might think about attempting to increase revenue alternatively. Reducing the most important thing of costs may affect the great name of the store as a small increase in prices could be evident if the quality of products in store remain the same.

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