Posted: January 26th, 2018
Category: Franchise Experts
Whether you’re buying an existing franchise or taking your own business and turning it into one, franchisees know that it’s a requirement to incorporate a franchise. While LLCs and Corporation tend to be the most common entities chosen, S Corporations have also risen in popularity thanks to the wide variety of benefits that this “pass-through” entity offers entrepreneurs.
If you’re thinking about incorporating as an S Corp, but still want more information about what this legal structure can do for a franchise, let’s break the ins and outs of this formation down for you.
S Corporations begin as C Corporations or LLCs, which makes it a C Corp with an S Corp tax election. That S Corp election tells the federal government to tax the entity as a partnership and not as a corporation, even though S Corp structures tend to operate in the same manner as corporations. Being taxed as a partnership allows the business to avoid double taxation at the corporate level.
Instead, S Corps elect to have profits, losses, deductions, and credits “pass-through” the entity level and taxed only at the shareholder level. Only the wages of S Corp shareholders, who are also employees of the business, are subject to employment tax.
If you’ve heard about the Tax Cuts and Jobs Act (TCJA), AKA the new tax reform law that gives S Corporations and other pass-through legal entities a 20 percent deduction for qualified business income, you might wonder how it will affect filing your taxes as an S Corp. The good news is that changes, while scheduled to take effect in January 2018, will not affect tax returned filed for 2017. For franchisees in need of extra filing assistance, I recommend meeting with a tax professional as soon as possible to review and determine which changes apply to your specific situation.