An S corporation is similar to regular corporations but with a different tax status. The so-called S corp tax status allows the business to enjoy the benefits of limited liability company, but the income taxes are paid on the same basis as a sole proprietor or a partnership. Only by forming an LLC or an S corp, you can avoid double taxation. These corporations have many advantages for the owners, such as the fact that the company’s profits are filed through the owner’s personal tax returns just like in LLCs, partnerships, and solo-proprietorships. If you are a new entrepreneur, read on to find out why forming an S corporation might be the right choice for your business.
Advantages and Disadvantages of Forming an S Corporation
Aside from exemption from double taxation, S corps have many other benefits over regular corporations. S corporation status allows you to claim business losses through your personal income tax return which enables you to offset other earnings you have previously earned. A great advantage also is that you will not be subject to self-employment taxes.
The only disadvantage of S corps is that the maximum number of shareholders is a hundred members. A hundred shareholders seem like more than enough, but if you are working with a tight budget, this might be a problem. In a case of having a small budget, but still deciding to establish a company, you should form an LLC or a limited liability company that has an unlimited number of shareholders. An LLC can even include other LLCs and corporations, so you won’t have problems building a strong, durable company from the very start. Another issue with S corporations might be the fact that this type of business structures doesn’t have to deduct the cost of fringe benefits provided to its employee-shareholders. That applies members that own more than 2% of the company.
Filing for S Corporation Status Is Not a Permanent Decision
A significant advantage of this type of business structure is that making the decision to file for an S corp status doesn’t have to permanent. If you change your mind, at any time, you may just switch to regular corporation status. There are company owners who consider S corporation entities a thing of past, but due to its significant benefits, this business structure still lasts.
Is LLC a Better Choice?
If S corporation doesn’t work for you, maybe an LLC will. If there is one thing better than S corporation status, that is an LLC. Limited liability companies are far more flexible and have greater tax savings and liability protection. LLCs don’t burden the shareholders with a bunch of formalities and make paperwork rather simple to handle.
With this business entity, you’ll never have to fear of being personally liable for something like in corporations. They allow flexible planning for asset protection and are easy to raise capital when needed. When selling the business, limited liability companies have better flexibility in dealing with the tax and financial consequences. This will make negotiations with a prospective buyer far less worrisome. With LLC you won’t have to worry again about risk management, privacy, and tax-efficiency and liability.