Tax Services For S-Corps
In Phoenix, Arizona
Professional Tax Preparation for S-Corps
The Pros and Cons of an S-Corporation Business Type
An S Corporation also called an S Subchapter, is a type of legal entity that can be established to operate a business. Before any business gains the S corp status and acquires the regular benefits of a corporation, it must meet specific IRS requirements. S corporations are taxed under Subchapter S of the Internal Revenue Code, making it a “pass-through” entity for tax purposes.
Overview
The Advantages and Disadvantages of an S Corporation
What are the advantages of an S corporation?
- Pass-through Taxation. The S Corp status is a common favorite among many small business owners because of its pass-through taxation. S Corporations do not have to pay federal taxes at the entity level. S corps are not subject to the Net Investment Income tax. Startups and businesses that are in their early years will have money-saving benefits on corporate taxes.
- Salaries and dividends. Shareholders can receive both employment salary and dividends from the corporation which are tax-free, only if the distribution does not exceed their stock basis. If a shareholder’s stock basis is higher than its dividends, the excess is taxed as capital gains at a lower rate compared to an ordinary income.
- Straightforward transfer of ownership. Shares and ownership interests can be transferred to other people or entities without having to comply with complex accounting rules. Unlike in a partnership or an LLC that a 50 percent interest can trigger the termination of the entity, S corps can easily transfer interests without the adverse tax consequences.
What are the disadvantages of an S corporation?
- Strict qualification requirements.
- Limited stock ownership. Because S corporations are only limited to one class of stock, there can’t be different classes of investors who are entitled to different dividends or distribution rights. In addition, shareholders can not be over 100, and foreign ownership is prohibited.
- S Corporations are constrained by rigid criteria of allocating profits and loss.
- Costs of Incorporation
- Arbitrary taxation
IRS Requirements for S Corporation Application
- Principal shareholders or owners must not be over 100
- The company cannot be owned by any other corporate entity including other S Corps, C Corps, LLCs, business partnerships
- Non-US residents shareholders are not allowed
- Shareholders must be individuals, certain trusts, and estates
- Strict regulations on issuing stock shares
S-Corporations are a popular business type for small business owners. Most people only see the tax benefits that a subchapter S provides without knowing that the S corporation arrangement can also bring disadvantages. There are a few other pros and cons of an S-corp that are not mentioned above. The S-corp arrangement is designed to benefit a particular group of business owners and a particular business goal.
Before deciding to elect as an s-corp, these benefits need to be carefully analyzed and compared to their potential downsides and limitations. Working with a qualified tax professional with extensive experience and training will help you choose what business type will suit your business goals. A tax professional is an ideal source of help in regards to your business’s financial aspects including management and taxes.
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