What are the Advantages and Disadvantages of an S-Corporation?

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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