Perhaps you have finally given into your entrepreneurial spirit and are ready to start your own business. How exciting!
If you haven’t already, you will soon hear all the talk about different ways to incorporate your business. For instance, should you do an LLC or C corporation? An S corporation is another option, and below are pros and cons to consider about this type of incorporation.
- Your personal assets are protected. A shareholder is not personally responsible for the corporation’s debts and liabilities.
- There are no federal taxes at the corporate level. Your shareholders will put those on their personal income tax forms instead.
- Your business will appear highly credible because of your commitment. Forming an S corporation can help improve your credibility among potential customers, vendors and business partners.
- Easy transferring of ownership. There are no accounting issues or negative tax consequences when the ownership is transferred to another owner.
- Profit from tax advantages for employees. A shareholder of an S corporation can also be an employee that draws a salary and receives tax free dividends.
- The IRS becomes more interested in you and may scrutinize your financial profile a little more due to the fact that shareholders of an S corporation can also receive dividends and salaries.
- Expenses can be an issue due to needing a registered agent and filing articles of incorporation. Although these expenses aren’t significant and can generally be written off, there are still some start-off costs involved.
- You must deal with stock and shareholder limitations. There can only be 100 shareholders and only one class of stock in an S corporation. Foreign stockholders are not permitted.
- Allocating losses to stockholders is not easily done due to the restriction of only one class of stock.
- S corporation status can be terminated if there are mistakes made regarding stock ownership, consent or various other tax related issues.
For more details regarding these pros and cons, check out this article from Bizfilings.com.
Also, read more about the differences between S and C corporations in our knowledge center.
There’s a lot to consider when deciding how to incorporate. At Maxfilings, we are available to help guide you in the best decisions for your business. Contact us anytime for assistance.