Learn More about an S Corporation below 

An S Corporation, commonly referred to as an "S Corp" is simply a corporation that has filed a document with the IRS to become a special type of corporation. The main difference deals with taxation issues, but additionally an S Corp only allows a specific amount of stock to be distributed and all holders must be residents of the United States. Shareholders rights are much simpler here and double-taxation that occurs with a C corporation’s income is eliminated.

Advantages of an S Corp:

  • An S corporation has a single level of taxation, where a C corporation is taxed on its earnings, and its shareholders pay a second tax when corporate earnings are distributed to them via dividends

  • Shareholders of an S corporation may deduct their share of the corporation’s net operating loss on their individual tax returns.

  • S corporations can be terminated at anytime and turned into a C Corp, LLC, or other entity

  • Owners can also minimize self-employment taxes as salaries are subject to self-employment taxes, but distributions are not

  • Interests in an S corporation can be freely transferred with less tax consequences than other business entities, and fewer accounting rules exist when ownership interest is transferred as well

Disadvantages of an S Corp:

  • Shareholder-employees of an S corporation are subject to stricter laws as they receive fewer tax-free fringe benefits

  • Tax rates may still be higher for individuals than at the corporate level that a C corporation would be taxed at

  • S corporations can terminate unintentionally as well, for example, if the number of shareholders exceeds the maximum permitted or if a nonqualified shareholder such as a corporation acquires stock

  • Impossible for a publicly traded company to be an S corporation

  • Owners sometimes will have to pay taxes on profit distributions they did not receive if the profit is reinvested back into the company

 

If you have any questions regarding the formation of an S Corporation or issues with a current S Corp, you can post a free request to our experienced business attorneys on UpCounsel who can help you today.