Are you sure you know everything before forming an S-Corp?

There are many who have the opinion that having an S-Corp has several benefits as well as cons

Are you sure you know everything before forming an S-Corp?

There are many who have the opinion that having an S-Corp has several benefits as well as cons. An S-Corp is a small corporation which elects itself in order to be taxed under Subchapter S of Internal Revenue Code which offers the electing corporation some tax benefits that are enjoyed by a partnership business. If you choose to begin an LLC, this can also make the election, allowing it to seek benefit of payroll tax savings.

Subchapter S corporations were designed to fill in the gap for domestic corporations which made sure that no member had liability but instead had 2 taxation levels and partnership form which provided an effective tax structure. As the entities have been here for a long time, they are not much common due to the LLC entity creation.

Subchapter S – Few benefits

One level of tax: Unlike a conventional corporation that had to pay taxes on their income, there’s no kind of double taxation in S Corporation. All income earned and losses incurred will be passed on to the shareholders.

Save on payroll taxes: The shareholder of an S corporation who is proactively interested in the corporation actually wears both the hats of an owner and an employee. The corporation should pay Medicare and Social Security taxes on the employees. Nevertheless, the distributions to the shareholders will not be subject to taxes. The more is the revenue that is received by the shareholder/employee in his capacity as the shareholder, the less will be the Social Security and Medicare taxes.

Cons of Subchapter S

As you form an S-Corp and you start expanding beyond a business, you may gradually find it tough to stay within the strict regime of S-corp. You should:

-Be a domestic corporation
-Not exceed the number 100 with regards to shareholders
-Have domestic people and few qualifying trusts as shareholders
-Have a single stock class

In case you fail to satisfy any such requirements, you will not qualify for the Subchapter S election and you will be automatically reverted to a less favorable tax regime of a normal corporation.

Then should you opt for an LLC?

On the contrary, an LLC is perhaps the most versatile and flexible business entity that is also tax-efficient. Although an S-corp offers a similar general flow through tax treatment, an LLC is better where there is debt involved and hence it is most versatile with no such restrictions on different shareholders.

Then why shouldn’t you form an LLC? This is because it will be costlier to form. The operating agreement of an LLC can be extremely complicated and there are also so many people who are more acquainted with a corporate structure.

If you intend that the business will remain small even in the near future with just American shareholders, the S-Corp might be the best option for you. But in case you think that you won’t be able to satisfy any of the requirements mentioned above, you may opt for an LLC. To know more, you may go through Incfile Reviews in order to know the way in which you should begin your business. 

Date Of Update: 11 June 2020, 07:02

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