S-Corporation Benefits

An S-Corp is a type of organization and entity that offers a structure for doing business and establishes a business as a legal entity for reasons of taxation, conducting business, and engaging in commerce. There are some individual characteristics of an S-Corporation that separates it from other types of corporations or business entities including the C-Corporation, Partnership, or Limited Liability Company (LLC).

The S-Corp is a corporation that has a limit on the number of shareholders. This limit is 100 and is designed for organizations where the corporate income is not taxed. The income is taxed, but is done at the individual shareholder level based on the revenue split among the 100 or fewer shareholders. This prevents the double taxation that occurs within the C-Corporation as the corporation itself is taxed and the individual shareholders are also taxed on their gains.

Depending on the business structure, there are other options for how a corporation chooses to be taxed. This may vary slightly by state, but subject to federal income tax means that the entity itself and how it chooses to be taxed are not always the same structure type.

One of the key features of an S-Corp is that it provides a liability shield to the shareholders. This means that in the event of a lawsuit or other judgement made against the business, the income and assets of the shareholders are not at risk.

An S-Corp can be formed by individuals and are a tool most suited for smaller businesses or family owned businesses. There is normally a minimal amount of capital raised to start an S-Corp and there is no minimum requirement. Each shareholder of an S-Corp must be either a U.S. citizen or resident, or must be an estate or can be a trust (depending on the trust type).

Stock is issued during the formation of the S-Corp and is filed as a part of the documentation when opening an S-Corp. The profit and loss is also done in proportion to the share of stock each shareholder has in the S-Corp. Shareholders can’t claim losses beyond the level of their cumulative investment.

The personal income tax return filed by the shareholders can include business losses from the S-Corp which can be used strategically to offset income from other sources. Because the S-Corp has a tax structure that matches more closely the partnership, it is not subject to tax rates in the same way a C-Corp would be. The shareholders are subject to taxes, however, for any of the income the company declares again in accordance with their corresponding ownership.

S-Corps may have a slightly more rigid structure with documentation of quarterly meetings and other requirements that may vary slightly by state. However, these meetings and minutes from meetings that must be tracked can be done with a minimal amount of overhead and very little cost. There are several advantages to setting up an S-Corp and although there may be some disadvantages, the liability shield that these S-Corps create tend to be much more beneficial than the potential issues that may arise by having an S-Corp.