When deciding if you should file an S election for a corporation, you want to think about the tax consequences of making that election. An S election has a whole series of hoops you have to jump through. The reason for wanting an S election versus a C corporation is it only has one level of taxation. Most of our startups at the end of their fiscal year, if they have a profit, pay it out as a bonus for the shareholders involved in the company. However, most of our startups don’t have a profit at the end of their first year. In that case they will do some good accounting to ensure that there is no profit which makes their maximum tax for the state of California $800 and almost nothing for the federal government. If you have lots of profits in the company and therefore choose to do an S election so that you don’t have the C corporation taxation level, then your profits and/or losses can be handed out based upon how much your shareholding interest is. This is different from an LLC since you can allocate the losses or the profits any way you want with an LLC. However, in a corporation, the board of directors can vote to take the bonuses out of the profits so that the profits go down to zero and you won’t pay corporate taxes.
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