S-Corporations Benefits and Drawbacks

S-Corporations: Benefits and Drawbacks

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:

 

  1. Asset protection: An S corporation provides the same protection from liabilities as C corporation.
  2. 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.
  3. Pass-through taxation: S-corps are taxed at individual tax rates that might be lower than corporation tax rates.

 

Cons:

 

  1. 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.
  2. Higher maintenance requirements: S Corporation must have annual Shareholder and Director Meetings and maintain proper corporate documents such as articles, bylaws, corporate seal etc.
  3. 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.