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Forming an S-Corp – What The Pros and Cons of Structuring One?

Once you have already decided about structuring your business in the form of a corporation, you still have yet another decision left to make, that of whether you wish to form a C-Corp or an S-Corp. One of the major factors which play a role in helping you decide is the tax concerns. Just as the partnership structure of a business is concerned, when you form an S-Corp, you don’t have to pay federal income taxes.

The profits and losses of the business are passed on directly to the shareholders who later on report the profit and loss statement to the personal tax return. This is considered as ‘single taxation’ and the procedure is different from C-Corps which are under ‘double-taxation’.

The benefits of forming an S-Corp
  • Does away with double taxation: In an S Corporation, profits and losses are passed directly to shareholders and the taxes are just paid once. You have to immediately check with your state in order to know the way in which it manages S-Corps. There are some states which don’t give any recognition to S Corporations and hence they will tax them as C-Corps.
  • Offers liability protection: Being an S Corporation owner, the best part is that your personal assets will be different from the assets of your business and hence they will remain protected in case there are any kinds of judgments or lawsuits against your business.
  • Accounting rules are simpler: Without any inventory, S Corporations can utilize the cash method of accounting and this is much simpler than what you call the accrual method. Have a talk with your accountant regarding the option that makes actual sense for the business.
Few cons of S Corporation
  • Too many fees and rules: Just as a C Corporation, S corporations are all needed to file a large number of federal documents and other state documents. They also require holding scheduled shareholder meetings and paying fees to the federal government.
  • Requirements for salary: The IRS or the Internal Revenue Service needs all the owners and officers of an S Corp to have a salary, even during a time when the company isn’t making any profit. This could definitely be a big problem for the businesses that are striving hard to make a payroll.
  • Restrictions of the shareholder: You have to realize that if there are shareholders of an S Corporation, they will be taxed for any amount of income, even when they don’t receive any portion of the income. Besides, S Corporations are just permitted to issue a single class of stock and this can dampen the spirits of the investors.

Therefore, if you’ve planned to form an S-Corp, make sure you hire registered agents who can work on your behalf when you’re not present. This will reduce the embarrassment of not receiving notices and will also help you succeed in your business. Make sure you consider both the pros and cons before taking a plunge.