The Pros and Cons of S Corporations
The question of whether an S Corporation is a right entity for you, or it is a great one especially if you are starting a new business or if you are changing the existing one from sole proprietor to general partnership as this are some factors that can make all the difference in asset protection, shareholders number, and taxes. Limited Liability Companies LLCs, C Corporations and S Corporation is the three selections for people who want to incorporate their business.
LLCs, S Corporations and limited partnerships are corporations that chose to pay their taxes like flow-through entities. In the IRS code section there is an S that is used in ‘S Election’ to assist shareholders in remunerating their taxes on a personal level and not on the corporate level, and so there is no risk of double taxation as is the case in C Corporation. So if you would like to know if the right entity structure either in general partnership or sole proprietorship, the answer is no. The reason being that there is no asset protection offered and it is easy to lose personal effects in a law court.
Both the shareholders and management have very limited liability to the S Corporations which is an advantage. There are not requirements on your residency or in management. You risk losing your personal effects as there is no personal liability protection and no court has helped in this. Shares could be sold or seized by a court order which makes it a disadvantage at the shareholders level.
Now if want to form a corporation all you need to do is file a document which will create life on a legal entity with its name, purpose of business and an IRS tax identity. It is the role of the corporation to supervise the business activities which is a move that protects the shareholders as well as the owners. It is advisable to form an S Corporation should you at one point decide that you would like to go public.
There is no self-tax for business owners which is their benefit. There is a core gain on taxation for S Corporation in that shareholders do not have to pay a self-employment tax on the businesses share profits. There will be individual taxes. Nevertheless this is subject to Medicare and social security that is often paid half by the corporation and the other half by the employee. The savings that are made as a result of no tax on self-employment and only come in as soon as the S-corp is making a considerable return and that there are some profits that can be paid after the statutory have been paid.