Identifying which business structure you want to use in a start-up seems like an easy choice. However, the wrong decision can cost you in the long run. The most popular company formation choices are S corporations, C corporations and LLCs. All have their benefits and disadvantages. Here is what you need to know about S corporations.
What is an S Corporation?
An S corporation is a type of business formation that allows a business to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. S corporations evade the double taxation that occurs with C corporations. Most income and losses flow through to each shareholder’s personal tax returns and are taxed at their individual income tax rates. However, S corporations are still taxed as an entity on specific built-in gains and passive income.
Per the IRS, here is what qualifies you to become an S corporation:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
What Are The Benefits of an S Corporation?
One of the largest benefits of an S corporation is the lack of double taxation. However, there are other benefits which include:
- Savings on Taxes: Owners are considered employees, which allows them to enjoy the tax breaks associated with self-employment.
- Credibility- Corporations, particularly S corporations, are considered a more legitimate business entity than partnerships.
- Tax deductions- Many of your business expenses are tax-deductible.
- It’s easy to raise capital and transfer ownership through shares.
- Limited Liability Protection– business owners are, typically, not held responsible for company debt and liabilities.
What Are The Disadvantages of an S Corporation?
There are not a lot of disadvantages to an S corporation. However, there are a few restrictions that are notable. Owners must be US citizens or permanent residents and the entity must not have more than 100 shareholders. S corporations also do not benefit from the “dividends received” deduction that C corporations receive.
Call on a Trusted Corporate Attorney
Regardless of the business, you need an experienced attorney who understands the ins and outs of business structures. From company formation to business litigation, the attorneys at Cipparone & Cipparone are here to assure that your business is safe from liability and set up for future profitability.
**This blog is for general informational purposes only. Cipparone & Cipparone, P.A. does not distribute legal advice through this blog. As such, this blog does not constitute legal or other professional advice and no attorney-client relationship is created between the reader and Cipparone & Cipparone, P.A.
Tags: business planning, business structure, s corporation, start-up