This paper discusses the advantages and disadvantages of S Corporation under tax purposes. Multiple sources have been used to determine the advantages and disadvantages. All the sources have the same information, with some being more in depth than other sources. The research does not seem to vary much. Multiple business sources online were used to determine the information in this paper, as well as a government site.
Keywords: S Corporation, advantages, disadvantages
There are different types of business entities available when forming a company. There is Partnership, Sole Proprietorship, a C Corporation, a Limited Liability Company and an S Corporation. This is a focus of an S Corporation. This is a review of an S Corporation and the advantages and disadvantages it carries. An S Corporation is treated as a pass through entity for federal tax purposes.
An S Corporation is created by filing Articles of Incorporation with the secretary of state or another government entity that is similar. An S Corporation is controlled as a corporation. It issues stock. Owners are known as shareholders. The owners have the same liability protection as a C Corporation. This means the owners’ personal accounts and assets cannot be used to pay off business debts and liabilities.
After looking at multiple sources, I have compiled a brief explanation of my finding about the advantages and disadvantages of having an S Corporation. They all have the same idea for advantages and disadvantages in forming and maintaining an S Corporation. Depending on the size of the business, an S Corporation may be most beneficial when forming a company.
An S Corporation passes its profits and losses through to their shareholders much like a partnership. There is also a double taxation like a C Corporation has. The taxes are applied to each shareholder based on their individual tax rate.
An S Corporation can be beneficial when transferring ownership or closing the business. S Corporation have the protection of personal assets of the shareholders. A shareholder is not personally responsible for the business debts and liabilities of the corporation. Creditors cannot go after the shareholders personal assets such as their house and bank accounts to satisfy the failings or debts of the S Corporation in a partnership or proprietorship the business and owners are considered the same so creditors can go after their personal assets.
An S Corporation does not pay federal taxes at the corporation level like a C Corporation does. Any income or losses by the business is passed down to the shareholders. The shareholders then report the income or loss on their personal tax return. In this case, the business loss can be used to offset other income on the personal tax return. This can be beneficial when a new business begins due to the extra expenses that are usually incurred when starting up.
S Corporations are characterized as tax-favorable. S Corporation shareholders can also be employees. Shareholders can also take a salary as an employee. Shareholders can also receive dividends from the S Corporation and other distributions that are considered tax free and limited by their investment in the corporation. Characterizing distributions as salary or dividends is considered reasonable since it can help shareholders reduce their self-employment tax. S Corporations can still generate business deductions for the corporation.
S Corporations have a very straight forward way to transfer ownership. An S Corporation’s interests can be freely transferred without having any horrible off putting tax consequences. In a partnership or a limited liability corporation, transferring over 50 percent interest can cause termination of the entity. Adjustments do not need to be made to the property’s tax basis in an S Corporation. There is also less need to be in compliance with the…