The Basics of a Michigan S Corporation
These days, Michigan entrepreneurs ultimately wind up deciding to structure their new business as either a Michigan limited liability company (LLC) or as a Michigan S corporation. There are some similarities to these two entities. For example, both LLC's and S corporations offer limited liability and tax treatment friendly to startups. However, there are important differences that must be taken into account when making the all important entity selection for a new business.
An S corporation is really just a "regular" business corporation that elects a special tax treatment. This special tax treatment is elected by filing a form with the IRS after the S corporation is formed by filing the appropriate paperwork with the State of Michigan.
Other than its special tax election, an S corporation has the same characteristics as a regular business corporation.
The special tax treatment afforded to S corporations is the same "pass through" tax treatment that partnerships and LLC's receive. In contrast, C corporation are taxed at two separate levels. This is what is commonly known as double taxation. The first level tax on a C corporation is a corporate income tax on the C corporation's income. The second level of tax is levied when the C corporation distributes profits to its stockholders, who then must pay personal income tax on their dividends. Under a S corporation, there is only one level of taxation. The corporate profits "pass through" to the stockholders, who then pay personal income taxes on those distributions at their individual tax rates.
Certain restrictions are placed on S corporation formations, which is why they are not always the best entity for new businesses. These restrictions include the following:
● An S corporation cannot have more than 100 stockholders. Further, each shareholder must consent to the corporation becoming an S corporation.
● Each stockholder in an S corporation must be an individual who is either a U.S. citizen or resident. In the alternative, an S corporation can be an estate or qualifying trust of an individual U.S. citizen or resident.
● An S corporation cannot have more than one class of stock. However, it is permissible to have voting differences within a class of stock. Having preferred stock is prohibited.
● All S corporations must use the calendar year as its fiscal year unless it can prove to the IRS that another fiscal year satisfies a business purpose.
Depending on your circumstances, an S corporation may be just the ticket for your business. However, caution should be had as choosing the entity for a new business is one of the most important decisions that you can make.
