Start a New Hampshire S Corp

Pros and cons of creating an S Corporation

While the S Corporation provides many benefits, it may not be the right fit for everyone. You should consider the pros and cons of the S Corp before deciding on the election.

Pros

When you create an S Corporation, you’ll get asset protection with pass-through taxation and tax-favorable characterization of income. The S Corp also allows for the cash method of accounting.

Cons

An S Corp requires additional formation and maintenance expenses. Your business will be subject to tighter tax qualification obligations, stock ownership restrictions, and closer IRS scrutiny. You’ll also have less flexibility in allocating income and loss. Finally, because New Hampshire doesn’t recognize S Corp status, there’s no benefit for state taxes (such as state income tax).

What to know before creating an S Corporation in New Hampshire 

First, you should know that the IRS has default taxation methods for each type of business. Second, New Hampshire doesn’t recognize federal S Corp elections, so you should consider the overall benefit of the S Corp election to your tax liability.

What is an S Corporation?

S Corporations are small business corporations with limited corporate shareholders. Those shareholders don’t pay federal corporate income taxes. Instead, the profits and losses are “passed-through” to the owners to pay at their individual tax rates.

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

The IRS’s default tax treatment for business corporations is the “C Corp.” C Corps are subject to double taxation, meaning that the corporation pays income taxes at the corporate level and withholds employment taxes from its employees’ wages. When you elect S Corp status, the profits and losses from the business are “passed through” to the business owners. The S Corp won’t pay corporate income tax. Instead, the owners will pay taxes on the business’s profits and losses on their personal income tax returns.

At the state level, New Hampshire taxes S Corps according to their underlying business structure regardless of their federal election. Therefore, S Corporation filing requirements are simple. If you formed your business as a corporation, New Hampshire will tax your business as a corporation. If you formed another entity type, the state will tax the S Corp as that entity type.

New Hampshire doesn’t have a general income tax, but it does charge taxes on dividend income. It also requires some businesses to pay a Business Profits Tax (BPT) and Business Enterprise Tax (BET). The entity type’s only difference is when calculating gross business profits (for BPT) or accumulated revenues and profits (BET). All businesses that exceed the tax thresholds will pay the tax regardless of the entity type.

What are the requirements to create an S Corporation? 

To create an S Corporation, you have to form a business that falls within the limitations identified above, and you have to file Form 2553 with the Internal Revenue Service (IRS) within one of the timeframes listed above. 

Can LLCs choose an S Corporation election?

Yes, LLCs can choose an S Corp election. By default, the IRS treats an LLC as either a sole proprietorship (one member) or a general partnership (multiple members). These entity types use “pass-through taxation.” Owners of “pass-through” entities pay income taxes on the business’s profits and losses at the individual rate. They’ll also pay self-employment tax on their income.

So if the LLC is taxed by default using “pass-through” taxation, what benefit can S Corp status make? When an LLC makes the S Corp election, the owners continue to report the business’s profits and losses on their individual returns. However, they will no longer pay the self-employment tax. Instead, the LLC will pay them a reasonable salary and withhold employment taxes on that salary. For more information on LLCs and tax treatment, visit our Tax Info for LLCs page.

We can help

When you’ve decided that the New Hampshire S Corporation is right for your new business, let us help. Our team of business experts can ensure you complete all the steps needed to form an S Corp. Then, we’ll guide you through legal compliance for the life of your business. Choose our products and services, and we’ll be here to answer all your questions.