If you’re thinking of organizing your business as an S corporation, you must determine if it is the right fit for your company. There are benefits and drawbacks of each business entity type. Below are a few pros and cons of having an S Corporation:
Pros:
- Asset protection: An S corporation provides the same protection from liabilities as C corporation.
- Lower self-employment tax: There is no self-employment tax on the distributions made to owners. However, the salaries to the owners are still subject to self-employment tax.
- Pass-through taxation: S-corps are taxed at individual tax rates that might be lower than corporation tax rates.
Cons:
- Strict qualification requirements: S corporations cannot have more than 100 shareholders and shareholders must be individuals. Additionally, these individuals cannot be nonresident aliens and it can only have one class of shares.
- Higher maintenance requirements: S Corporation must have annual Shareholder and Director Meetings and maintain proper corporate documents such as articles, bylaws, corporate seal etc.
- Salary requirement: The owners of S corporation must pay themselves a reasonable salary and withhold and pay all federal and state payroll taxes.
We can help evaluate your business and recommend the correct entity type that best suits your business needs.