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The Pros And Cons Of Using An S Corporation

There are many possible legal structures for owning a business, each with its costs and benefits. Legal structures are tools to help you reach your goals, and you need the right tool to do your job effectively and profitably as a business shareholder lawyer can explain.

What Is An S Corporation?

An S corporation, or S-Corp, is a type of corporation where shareholders pass corporate income, losses, deductions, and credits to themselves for federal tax purposes. With this approach, the corporation doesn’t pay federal income taxes but the shareholders could (depending on their overall financial situation).

The business must meet particular Internal Revenue Service (IRS) requirements to qualify as an S-corporation, including having:

  • No more than 100 shareholders
  • One class of stock
  • Shareholders who are individuals, estates, or certain trusts

An S corporation has similar features to a limited liability company or corporation (LLC) because there’s no double taxation, and the business owners may be able to avoid personal liability for business debts and obligations. If these are your goals, you should also consider forming an LLC.

What Are The Pros And Cons Of Using An S Corporation?

An S corporation offers advantages and disadvantages compared to other business forms. According to our friends at Focus Law LA, the benefits include: 

  • One of the most significant advantages of an S-corp is its pass-through taxation. The company’s profits and losses pass through to the shareholders, who report them on their tax returns. This can potentially lower overall taxes compared to a C corporation, where the corporation is taxed at the corporate level, and then shareholders are taxed again on dividends (known as double taxation)
  • Like C corporations, S corporations offer limited liability protection to their shareholders. They are typically not personally liable for the corporation’s debts and obligations beyond their investment in the company
  • S-corporation shares may be easily transferred or sold to other individuals or entities, making it relatively simple to bring in new investors or transfer ownership interests

Some S Corporation Disadvantages Include:

  • S-corporations have strict eligibility requirements, including limits on the number and types of shareholders 
  • S-corporations cannot issue different classes of stock, which may limit your ability to raise capital compared to C-corporations 
  • While S-corporations offer pass-through taxation, shareholders may still be subject to self-employment taxes on their share of the company’s profits. S-corporation owners may be unable to take advantage of certain tax deductions and credits enjoyed by C-corporation shareholders
  • S-corporations are subject to stricter operational requirements and regulations than other business structures, such as LLCs. S corporations must hold regular shareholder meetings, maintain accurate financial records, and adhere to certain corporate formalities to maintain their status

Whether you’re starting a business or own one and want to explore how a different type of business entity may bring you more benefits, contact an attorney familiar with business law to discuss your options; they will be able to guide you to the best structure for your company based on your goals and the other parties that plan to be involved with your business.