An S corporation is a unique corporate structure that offers the security of an LLC while allowing profits and losses to be passed directly to shareholders. An S corp structure dictates that income as well as losses by the corporation must be listed on individual shareholder tax returns, which means that the company is not required to pay federal taxes. While some people find that S corps are a better option than traditional corporate structures, not everyone agrees. If you are interested in starting an S corp, it is important to understand both the advantages and the disadvantages offered by this business structure.
The Advantages of Creating an S Corp
There are a number of benefits that are made available by creating an S corp, which include the following:
- Cash method of accounting. This process is much simpler than the accrual method and allows individuals to tax income as it is received and deduct expenses as they are paid.
- Limited liability. The people who create S corps assume limited liability for items including debts and claims that are initiated against the company. This level of limited liability is similar to the protect offered by LLCs.
- Freely transferable stock. Stock associated with S corps is freely transferable without being required to obtain approval from any shareholders. This is more advantageous than how stock must be transferred in many other types of business structures.
- Formation. An S corporation can be formed by a single person, while other business structures requires multiple individuals.
The Disadvantages of Creating an S Corp
While there are numerous benefits offered by S corps, there are some distinct disadvantages, which include:
- There are limitations regarding shareholders of an S corp. For one, an S corp is only able to elect a maximum of 75 shareholders. Second, the types of entities allowed to be shareholders are limited and only include estates, certain partnerships, certain trusts, individuals, tax-exempt charitable organizations, and other S corps. This differs substantially from other business structures like LLCs, which can have an unlimited number of owners.
- S corporations must meet a number of different requirements, such as holding director and shareholder meetings, filing articles of incorporation, and keeping meeting minutes.
- There are strict filing deadlines when it comes to S corporations. A business is required to file S corporation paperwork within two months and 15 days of the first of the tax year. Failure to do so can result in a business’s S corp status being revoked.
Speak with an Experienced Corporate Law Attorney
If you are interested in creating an S corp or any type of business, it is common to be confused by all the available business structure options. Contact Resnick Law today to speak with an experienced corporate law attorney who is prepared to discuss what business structure will work best for you.
(image courtesy of Alex Read)