The Advantages of an S Corporation
One of the main reasons that people choose to form a corporation versus any other type of business structure is because the corporations provide the business with tax savings. Despite the double taxation that you hear about with corporations you can still benefit from tax savings, but how much you benefit is going to depend on whether you form a c corporation or an s corporation. The S corporation advantages far outweigh the c corporation advantages when it comes to taxation.
One advantage that S corporations have over c corporations is that they avoid the double taxation. The double taxation only affects c corporations because they are taxed at both the corporate and individual level. With c corporations the profits of the corporation are taxed and the shareholders are taxed on any money that they withdraw from the corporation, including salaries, bonuses, and dividends. The S Corporation is taxed more like a general partnership because the S corporation allows pass through taxation. With this kind of taxation the S corporation, it does not pay any income tax, only the shareholders pay income taxes on their share of the profits.
The S Corporation advantages are not strictly tax advantages. With an S corporation, you also get the advantages of having limited liability. Within a partnership, both you and your partner are jointly responsible for any business debts and liabilities that are incurred for the partnership. When forming an S corporation you are under a corporate veil, which means that your [personal assets are protected, you cannot be personally sued for any business debts and liabilities, unless a personal guarantee was signed.
General partnerships require you to have a partnership agreement and limited liability companies are required to have an operating agreement, but with the S corporation, either of them is required. With an S corporation, you will need to have your articles of incorporation or the certificate of incorporation on file. The certificate of incorporation is what dictates the rules that your corporation is going to follow; it also lists the board of directors, the number of shareholders, whether or not you will issue stock, and anything else that has to do with the running of your corporation.
Getting to issue stock is another advantage that an S Corporation has over partnerships, sole proprietorships, and limited liability companies. By being able to issue stock your business will be able to attract outside investors, which can increase your corporation’s working capital. Other forms of business cannot issue stock so they have a harder time attracting investors. The only disadvantage to the S corporation when it comes to issuing stock is that an S corporation can only have a maximum of 75 shareholders, so the amount of stock that can be issued is limited.
When comparing an S Corporation to other types of businesses something else that you will notice is that an S Corporation has the advantage of always being in existence. With partnerships and limited liability companies if own of the members decides to retire or dies the business no longer exists. With a corporation no matter what happens to the shareholders, even if they sell their shares of stock, the corporation will continue to do business. A corporation can only stop doing business by being formally dissolved through the courts.
