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Advantages of an S Corporation

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Authored by Rodney Southern in Business Management 
Published on 02-23-2009

An S corporation, or an S Corp, are corporations that are not required to pay income taxes, but they still must file a federal tax return and some will need to file a state tax return. The losses and income from an S Corporation will be passed on to their shareholders. The shareholders are then responsible for the taxes.

There are several advantages of an S Corporation. One main advantage is the ability to pass along any corporate losses to the corporations shareholders. The shareholders are then able to report these losses on their individual tax return.

S Corporations are able to be protected via limited personal liability. This protection also allows them to not have to pay any corporate taxes. The risks are then reduced for the company’s owner. This also applies to the S Corporations shareholders.

S Corporations are able to lessen FICA and self-employment taxes. The shareholders, however, will not be taxed in the same manner. This is more to the advantage of the S Corporation itself. Overall, tax accounting is far easier for an S Corporation than it would be for a partnership. They are also able to save corporate income taxes, but the process can get quite complicated.

Another advantage of S Corporations is that they will have a much easier time raising capital. They will be able to gather money much easier than a partnership or a sole proprietorship.

Another advantage of an S Corporation is that the interest that is incurred in buying S Corporation stock may be seen as an investment interest expense. If the business is sold, the taxable gain made on the sale has the potential to be far less that it would for a business with C Corporation status. Business owners can choose to change the status of their business from S Corporation status to C Corporation status at anytime if they feel it would be more beneficial to them.

Certain regulations must be met in order for the advantages of S Corporations to apply. All of the shareholders that are part of an S Corporation must be U.S. Citizens. All of an S Corporations shareholders must always vote in favor of their particular S Corporation. S Corporations may not deduct benefits such as accident or health insurance for employee shareholders.

Large corporations are not the only businesses that can reap the advantages of S Corporations. Small businesses are eligible for this status as well. Small business owners who would like to offset their spouses income or take their business losses on their tax return can opt to become an S Corporation. Those who set up an S Corporation and then later decide that this is not what they wanted can vote to drop their status as an S Corporation. Of course, if this status is dropped they will no longer have the advantages of an S Corporation.

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