Forming an S Corp: An introduction to the benefits of the S Corporation

If you own a business that operates as either a sole proprietorship or a partnership--rather than as a limited liability company or corporation--you suffer in two big ways.

Dangers of sole proprietorships and partnerships

The first problem: You are legally liable for the all the debts of the proprietorship or partnership as an owner or co-owner of the business. Specifically, no matter what happens, in some cases no matter who is at fault, no matter what the amount, you are liable.

In a worst-case scenario, you could lose almost everything you have.

But that's not the only problem with operating an un-incorporated business. You also have a second problem. In addition to the income taxes you pay on your business income, you also pay a second heavy tax on all your business profits, the self-employment tax.

Many small business owners, in fact, pay more in self-employment taxes than they pay in federal income taxes.

That's the bad news, so to speak.

Advantages of setting up an S corporation, or S corp

Fortunately, you also have some good news. You can often fix both problems easily, quickly, and often inexpensively by forming an s corp, or S corporation.

How? First, you can setup a limited liability company and use it to run your business. This largely solves the unlimited liability problem. A limited liability company, or LLC, means you aren't liable for the debts and obligations of the business merely because you own some or all of the business.

Second, you can use a quirk of recent tax laws to have your LLC taxed as an S corporation, or S corp. But let me explain.

A limited liability company, or LLC, lets its owners select the tax treatment they want for their business. For example, an llc with a single owner can be a sole proprietorship or a C corporation (also know as a c corp) or an S corporation (also known as an s corp). And an LLC with multiple owners can be a partnership or a C corp or an S corp.

This tax flexibility means you can pick the tax treatment that saves you the most taxes--often times, thousands of dollars a year in self-employment taxes if you elect to have your LLC treated as an S corporation.

Here's the bottom line: If you're starting a new business or if you operate an existing business, you must investigate the limited liability company option and the S corporation election you can make for your limited liability company.

You owe it to yourself.

You owe it to your family.

The Do-it-yourself Approach to Forming an S Corp, or S corporation

This web site supplies information about Subchapter S corporations, or S corps, which you can use to begin your investigation.

This web site also sells do-it-yourself kits for forming an S corporation, which some people will feel comfortable using for setting up an S corp, or S corporation. These s corp setup kits provide two things: A roughly 25-page pdf document that details the advantages of forming a llc as the foundation of your s corporation, provides step-by-step instructions for forming the llc, tells where and how to download free llc formation forms, and explains how to make the tax-related elections to have the llc treated as as an S corporation, thereby saving you thousands of dollars in self-employment taxes each year. The kits all also supply sample operating agreements, which are the governing documents that determine how the S corporation works and how its owners interact with the S corporation. These sample operating agreements come in the form of downloadable Microsoft Word files so you can open and edit them.

You ought to consider a do-it-yourself approach to forming an S corp, or S corporation, in two situations: First, if you need an S corporation fast. But let me explain. Some of the online paralegal services sell incorporation services for prices that appear similar to what I charge for a kit. However, if you look closely at their offers, you will typically find that they take weeks to process your request. (That's crazy, the process for forming an S corp online using one of my s corp kits in a few minutes.)

A second reason to use one of my do-it-yourself s corp kits is when you're on a tight budget and can't afford to spend several hundred dollars (or several thousand dollars) on an attorney, accountant or online paralegal service. In this case, you may as well do the work of forming an s corp yourself. (Very frankly, with good instructions, the setting up an S corp, or S corporation, is not that difficult.)

Note: The do-it-yourself s corp kits are instantly available as downloadable documents if you have a PayPal account or a credit card. Simply pick in which state you want to setup your S corporation, click the Buy Now button, and give your PayPal account or credit card info. You can begin the work of setting up your s corp a minutes from now... and you may be finished with forming an s corp in less than an hour!