S corp

What is an S corp?

An S corp is a unique business structure that combines the simplicity of a sole proprietorship or partnership with the liability protection of a corporation. It allows businesses to use a “pass-through” tax structure, which means they bypass federal corporate income taxes.

Advantages of an S corp

• Tax perks: The standout feature of an S corp is its tax advantage. Instead of paying corporate taxes, profits and losses pass through to the shareholders’ tax returns. This can lead to potential tax savings.
• Limited liability: An S corp protects the owner’s personal assets similar to an LLC if the business runs into legal trouble.
• Lower taxes. S corp status can help business owners save money on their personal income taxes. S corp owners often reduce their self-employment tax obligations by categorizing money received from the business as salary.

Disadvantages of an S corp

The downside of setting up and maintaining an S corp is that it takes time and money.

• Paperwork: S corps have administrative requirements like regular meetings and record-keeping to maintain their status.
• Ownership restrictions: There are some rules around who can own an S corp. Generally, individuals, estates, certain trusts and tax-exempt organizations can own shares.
• Individual responsibility: Shareholders are responsible for reporting financial data to the IRS via their returns. Although individual tax rates may be lower than corporate rates, shareholders can be held accountable if the information is not reported correctly.

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