Should Your Small Business Become an S Corporation?
Pros and Cons of an S Corporation
Determining the type of company structure best for your small business can be a confusing exercise. Is an S Corporation advantageous for your ? A little insight into the pros and cons of becoming an S Corporation may help in your decision-making process.
What Is an S Corporation?
An (Small Business Corporation) is a business elected for S Corporation Status through the IRS. This status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a .
Pros of S Corporation Status
No Corporate Tax: The biggest attraction of this to a business owner may be the . The profits and losses of the business pass through to the owner's personal income tax. Like a , the tax "pass-through" allows you to avoid "".
Reduce Taxable Gains: Selling your business can be part of your retirement strategy. An S corporation could have reduced taxable gains when the business is sold.
Write off Start-up Losses: In the early years of , you will have and losses. These can be offset against your personal income. A regular corporation would have the losses locked within the company and not applied to your income.
Liability Protection: S corporations offer protection against liabilities. However, is not complete protection. You can be personally liable for your actions. In addition, many lenders are now requiring .
Cons of S Corporation Status
One Class of Stock: Choosing an S Corporation status will limit your organization to issuing one class of stock. Not having the ability to issue different classes of stock affords a business less control over the company and limitations on the stock value.
Less Attraction for Outside Investors: Growing your company requires money. If you will need , the regular corporation structure will be a better choice. will not want to see the pass-through tax setup or a limit of 75 shareholders.
Tax Filing: Unlike a non-corporate business structure, you avoid corporate taxes but will still have to every year.
Corporate Meetings: Your status is still a corporation with the requirements of having regular meetings and maintaining company minutes. Consider the added time in operating an S Corporation. Small businesses today are making the choice to form a Limited because they are .
How to Form an S Corporation
Changing your requires the filing of Form 2553 with the IRS. To become a small business corporation, the IRS has several special requirements including:
- The corporation can have no more than 75 shareholders with a husband and wife counting as one shareholder. (before 1997 it was 35 shareholders)
- Shareholders can be individuals, estates, and certain trusts.
- Shareholders cannot be non-American residents.
- You must be a domestic company in any state.
- All shareholders must agree to the .
Deciding on the for your situation is never easy. This article should provide you with the basics of S Corporation status and help guide your decision of company business formation. Each state's laws differ as well as each company's situation. It's advisable to seek tax and legal counsel to determine the best choice for your individual circumstance.