S-Corp Overview
An S Corporation(S Corp) or Small Business Corporation allows taxation of the company similar to a partnership or sole proprietorship. By forming an S Corp, you don’t pay taxes as you’d on a corporate tax structure. An S corporation issues stock comprising directors, officers, and shareholders responsible for functioning as a single unit. Unlike proprietorship, An S corporation shareholder’s personal assets, like personal bank accounts, cannot be seized to satisfy business liabilities.
Advantages and Disadvantages of S-Corps
S-corp advantages and disadvantages are two areas that business owners need to consider when planning to elect an S corporation. They should look at these points critically and ensure alignment with goals. Nonetheless, electing an S corporation has greater positive opportunities than drawbacks.
- An S Corporation:
- Has credibility among vendors, customers, and partners.
- Avoids double taxation; profits are directly passed to shareholders.
- Earnings are only taxed once, at the shareholder level.
- Requires distribution of profits based on ownership percentage.
- Faces restrictions on size and number of shareholders by the IRS.
- Imposes corporate formalities requiring annual meetings and allocation of profits and losses.
- Can elect S corporation status by filing Form 2553 with the IRS.
- May have barriers to having over 100 owners or foreign shareholders.
Appreciated property distributions generate shareholder gain, and distributions avoid payroll taxes.
Comparing S-Corps and C-Corps
The main difference between a C and S Corporation is that C Corporations face double taxation and are separate entities, whereas one of the benefits of S Corp is that S corps are taxed once and are pass-through entities. Both C and S corps provide limited liability protection for owners and shareholders, adopting bylaws, issuing stock, holding meetings, filing reports, and paying fees and taxes. Both are required to submit tax return filings for income and profits.