Is an S Corporation Right for You?
Business owners who wish to incorporate their enterprise face a wide variety of options to choose from, each with different advantages and responsibilities that follow. If you are the owner of a small but growing business, you may have considered whether an S-corporation is the right choice for your enterprise. There are a number of unique advantage that come from this structure when compared with other types of incorporation, such as LLCs or C-corporations, and depending on your needs you could find that the benefits offered by an S-corporation are just right for your current situation and future goals. Once you learn all about what an S-corporation can mean for you, you could be ready to take your business in the direction you want so it can thrive for years to come.
Benefits of an S-Corporation
While LLCs and C-corporations have become popular forms of incorporation over the years, the S-corporation remains less common and in some ways more specialized for business owners. However, it offers a range of powerful advantages compared to the other structures that could be ideally suited for a wide range of businesses. S-corporations have many of the benefits of corporations yet face a tax structure similar to that of partnerships. With an S-corporation you are able to avoid double taxation for earnings and losses and can pass them through your business to personal income. This can be especially useful to businesses during the start-up phase, when many businesses will lose money for months. You could use this to reduce your effective income and the tax rate you will have to pay at the end of the year. Another benefit to an S-corporation is that only one person is needed to start one, unlike the two people often needed at a minimum to start an LLC. S-corporations have a number of restrictions on ownership relative to C-corporations or LLCs, and ownership of the company is limited to 75 stockholders. However, unlike in an LLC, ownership of stock can be transferred freely without requiring the consent of other owners. In addition, an S-corporation will also persist even after its original owners and founders have ceded control, while the existence of LLCs are contingent on the continued participation of their owners. An S-corporation is also able to issue stock, however, this is limited to one type of class. While this can present limitations to those who seek to raise capital, it can also simplify ownership and allow new investors to easily enter as old ones exit. One of the best advantages of an S-corporation is its ability to pay investors and owners through stock and “distributions,” which are not subject to taxation as wages provided they are within “reasonable” limits. However, this type of corporation requires a yearly filing fee as well as the necessary paperwork which is required to be filed within the first two months and fifteen days of the year for your business to qualify, so you’ll want to make sure to stay on top of your responsibilities or your company’s status could lapse.
In Summary
An S-corporation provides a wide range of potential benefits to its owners, and combines some of the flexibility of partnerships with the protections that are afforded by corporations. They have a unique ownership structure that makes it easy to transfer control between investors and to new owners should you decide to sell, and are ideal for start-ups thanks to their ability to pass through income and expenses directly to owners. If you think they might be the right one for you, you can get started on the process for incorporation today.