What are the Advantages and Disadvantages of an S-Corporation?
What is an S Corporation?
An S corporation- commonly referred to as an S-Corp- is a corporation that is, for tax purposes, treated as a pass-through entity through making the S-Corp election with the IRS. There are many advantages and disadvantages of filing your taxes as an S-Corp.
Advantages of an S-Corp
The advantaged of an S-Corp can include:
- Limited liability. Members of the company, including management, officers, shareholders, and even employees, can enjoy limited liability.
- Pass-through taxation. This means that the owners of the company report their share of profit and loss on their own individual tax returns.
- Elimination of double taxation of income. An S-Corp can help avoid taxation as corporate income and again as dividend income
- Investment opportunities. Investors may be attracted to the company via the sale of stock shares
- Perpetual existence. The business can continue to exist even if the owner dies or leaves the company
- One-a-year tax filing requirement. S-Corps only have to file their taxes once a year as opposed to quarterly as a c-corp.
Disadvantages of an S-Corp
While there are many advantages of an S-Corp, it also has some drawbacks. Some disadvantages of an S-Corp could be:
- Limited to who can elect the S-Corp status for their Business. Only U.S. citizens and permanent residents can have an S-Corp
- Limited ownership. There is a limit as to how many shareholders an S-Corp can have. An S-Corp can have no more than 100 shareholders.
- Formation and ongoing expenses. An S-Corp business must be incorporated and, as a result, is subject to incorporation fees. They must also obtain a registered agent which could cost money. Many states also require the business to pay fees like franchise fees, if applicable, and fees to file annual reports.
- Closer scrutiny by the IRS. Payments to employees or shareholders may be scrutinized since they can be distributed as either a salary or dividends, each which are taxed differently.
If you would like to know more about forming a business or if an S Corporation may be the correct election for your business, it is important to contact an experienced business law attorney.
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