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S Corporation: Has some great advantages too!

S Corporation Overview:

Some small businesses find an S corporation to have enormous appeal rather than a regular (C) corporation, because of the tax advantages while still maintaining the liability protection of a regular corporation. With an S corporation, the profits and losses are passed through to shareholders and are included in the owner’s personal income tax returns. This results in only one level of federal tax to pay. 

Another advantage of the S corporation, is that you may be allowed to continue the cash basis for accounting, if you do not have inventories to deal with.  The cash method of accounting is much easier than the accrual method.  Under the cash method, income is taxable when received and expenses are deductible when paid. 

S Corporations are allowed to have up to 75 shareholders. This allows the opportunity to have more shareholders, and have more ability to attract capital to start and operate your small business.

S corporations also have their negative aspects.  For example, they are subject to many of the same requirements as regular (C) corporations, which mean that they have higher legal and tax service costs.  With an S corporation, you must file articles of incorporation, hold directors and shareholders meetings, keep corporate minutes, and allow shareholders to vote on major corporate decisions.  The costs of setting up an S corporation are also very similar to setting up a regular C corporation.

Another major difference between an S corporation and a C corporation, is that an S corporation can only issue one class of stock. Some experts say that this inhibits a company’s ability to raise additional funds.

Unlike a regular corporation, S corporation stock can only be held by individuals, estates and certain types of trusts. Tax-exempt organizations such as qualified pension plans were added to this list in1998 giving greater access to capital, as a number of pension plans were then willing to invest in closely held small-business stock.

In summary, the primary advantages of an S corporation over a regular corporation is that there is only one level of federal taxation will maintaining the liability limitations associated with corporations in general.  Also, some companies are allowed to maintain the cash basis of accounting, which helps to simplify things.  For further guidance always seek the advice of your accountant or attorney. 

Information by Start Your Own Business by Rieva Lesonsky

Webpage and Starting Your Own Small Business Course by Paul Susic MA Licensed Psychologist   Ph.D. Candidate  CEO/President Susic Psychological Consulting P.C.