File a Rhode Island S Corp

What to Know Before Creating an S Corporation in Rhode Island

An S Corporation is a good option for many business owners, but not all of them. It may be a good idea to evaluate the pros and cons of an S Corp to ensure it’s the right entity for you. You never know, a C corporation may be the better option. Again, as we mentioned earlier, when you create a corporation, it’s a C corporation by default. To convert to an S corp, you have to file Form 2553.

What is an S Corporation?

An S Corporation in Rhode Island is a pass-through tax entity. This means that the income from a Rhode Island S Corporation passes directly to its owners. Instead of having to pay an extra tax on corporate profits, S Corporation shareholders only need to pay income taxes when they file their own individual returns. Because an S Corp can only be an LLC or corporation, this means Rhode Island S Corporations also have limited liability. You shouldn’t be held personally responsible for any debts or liabilities of the business except in certain extreme cases.

What is the Difference Between a Rhode Island S Corp and a C Corp?

One difference is that C Corporations can issue more shares of stock and create more classes of stock than an S Corporation. Though important, this isn’t really the biggest difference. The big difference between an S and C Corp has to do with taxes.

In Rhode Island, S Corporations are taxed as pass-through entities. A typical C Corp pays corporate income taxes on the income earned by the company. S Corporation owners pay taxes on the income as if it were their own income and not the entity’s income. An S Corp’s pass-through taxation simplifies taxes and helps prevent the burden of double taxation. 

Can LLCs Choose an S Corporation Election?

Yes! An LLC can also elect S Corporation status. Most LLCs that convert do so for tax reasons. As an owner of a limited liability company (LLC), you’re usually responsible for paying a self-employment tax on net earnings. However, if your entity is an S corporation, you may not owe any self-employment tax if you receive a reasonable salary from the company. However, S Corp status doesn’t eliminate Social Security and Medicare withholdings. If you’re interested in learning more about LLC tax issues, check out our article on the subject.

S Corporation Limitations and Requirements

You must meet specific criteria before an LLC or Corporation may choose S Corp Status. The entity:

• May not have more than 100 owners
• Must be owned by U.S. residents, trusts, or estates
• Must have only one class of stock
• May not be an ineligible entity such as a financial institution or insurance company

If one of these requirements isn’t met, then you won’t be able to elect S Corporation status. An S Corp might not be the best option if you’re looking to bring in a lot of shareholders or foreign investors to join your business.

Pros and Cons of Forming a Rhode Island S Corporation

Although there are benefits of having a C corporation, deciding whether a Rhode Island S corp is right for you depends largely on your preferences and needs. There are certain benefits of an S corporation.

Rhode Island S corp pros:

• Limited liability protects personal assets from business debts and liabilities
• Pass-through taxation can simplify the tax treatment of the business
• Avoidance of double taxation issues of C Corps and the self-employment taxes of LLCs

S Corps have their own downsides. The main cons of an S Corp include:

• More expensive and complicated than a sole proprietorship
• Ongoing maintenance requirements
• You could face tighter IRS scrutiny when you employ yourself through an S Corp

If you decide to create an S Corp, we’re happy to help you with the process.

We can help 

While all this may seem overwhelming, we’re here to help. As you form your company and transform it into an S Corporation in Rhode Island, we can guide you through every step of the process. Whenever you form a new company, we can help you keep it running smoothly. If you need Business Plan, an EIN, or would like state compliance help with our Worry-Free Compliance Service, we are here to help.