Start a Hawaii S Corp

Pros and Cons of Creating an S Corporation

Does the S Corporation status fit your company’s needs? This will depend largely on what you’re looking for in your business entity.

Pros

Being incorporated as an S corporation may benefit your company in several different ways, including:

• Protecting your personal assets
• Eliminating corporate taxes that lead to double taxation of business profits
• Allowing you to use the cash method of accounting

If one of your main worries when deciding which type of company to set up is whether you’re going to end up paying too much tax, then an S Corporation may be best suited for you. See our Tax Calculator to estimate S Corp taxes.

Cons

Depending on the kind of business you run, there may be some downsides to an S corporation election. Some disadvantages include:

• Additional costs associated with formation and maintenance
• Limitations on issuing stock
• More extensive IRS oversight
• Stricter eligibility criteria

We recommend that you consult a qualified attorney before deciding if an S Corporation works best for you.

What to know before creating an S Corporation in Hawaii

You don’t actually “form” an S Corporation like you would an LLC or corporation. Instead, you’ll need to convert your existing business entity into an S Corporation. By default, when you form a corporation, it’ll be a C Corporation and not an S Corp. 

What is an S Corporation?

An S Corporation is similar to a corporation in that both offer limited liability, but the way they are taxed is different. An S Corp is a tax election made by corporations or LLCs. Electing S Corp status changes how the entity is taxed. S Corps are taxed as a pass-through entity. This means that the entity doesn’t pay a corporation income tax. Instead, the taxes pass through to the shareholders. Doing this can help avoid double taxation.

Double taxation can occur with C Corps because C Corporations pay income tax at the corporate level. When the C Corp makes a distribution to the shareholders, the shareholders pay taxes on the dividend. In this scenario, the corporation’s income could be taxed twice as corporate income tax and then as a tax on the dividend. 

What’s the difference between an S Corporation and a C Corporation?

C Corporations can issue more shares of stock and more classes of stock than an S Corporation, but for many, that’s not the most significant difference between S Corporations and C Corporations. A big difference and big draw for many who elect to be S Corporations instead of C Corporations is how S Corporations normally pay income taxes.

C Corporations pay double income taxes because the business pays income taxes at the corporate level, and then each shareholder has to pay taxes on the distributions they receive from the corporate income. On the other hand, S Corporations normally enjoy pass-through taxation. Pass-through taxation means that the S Corporation normally doesn’t have to pay taxes on the corporate income—only the shareholders pay taxes on their shares of the corporate income.

What are the requirements to create an S Corporation? 

To create an S Corporation, first, you’ll have to form a business that falls within the limitations identified above. To actually convert to an S Corp, you need to file Form 2553 with the IRS within the timeframe listed above. 

Can LLCs choose an S Corporation election?

Yes. Just like Hawaii corporations, limited liability companies can elect S Corp status. This election is usually for tax purposes. LLC owners typically pay self-employment taxes. With S Corp status, owners could bypass this tax if they pay a reasonable salary. Of course, the owners still pay income tax on their salary, but this can still be an advantage over paying self-employment taxes on the entire income of the LLC. For more information, check out our LLC Tax Info page. Check out our article on the differences between an LLC and a S-Corp.

We can help

If all this seems overwhelming, don’t panic! We can help simplify the process of forming your entity and converting it to a Hawaii S corp. As a business owner, you have a lot to handle, so let us take some of the work off your hands. In addition to forming your entity, we offer many other services! We can help you make a Business Plan, Get an EIN, and rest easier with our Worry-Free Compliance. We don’t just want to help you start your business, we want to help you keep it running as well. 

Our formation services take much of the guesswork out of forming a Hawaiian corporation or a Hawaiian LLC. We understand that you have more important things to do than spending hours figuring out how to get your entity set up. That’s why we offer a range of products that allow you to spend less time sweating the small stuff and more time making a profit.