Advantages of an S Corporation

October 29, 2011

An S corporation is a unique corporate entity created by the rules of the Internal Revenue Code. Operating as an S corporation gives owners of the company both legal and taxation benefits. To qualify as an S corporation, the company may have no more than 100 shareholders, all of whom must be citizens or resident aliens of the United States.

Liability
One of the biggest advantages of operating as an S corporation is that the company owners have limited liability protection from the corporation’s liabilities, debts and obligations. Owners of an S corporation are liable for the company’s debts and obligations only to the extent of their investment in the company. The personal assets of an S corporation owner may not be used as compensation for the company’s debts or liabilities, even those that result from lawsuits. In addition, a personal creditor of an S corporation owner cannot pursue the assets of the company as compensation for the personal debts of the owner.

Taxes
Another significant advantage of an S corporation is that S corporations are not required to pay income taxes on a business level. Instead, an S corporation is treated as a pass-through entity that allows the owners of the business to report their portion of the company’s profits and losses directly on their personal income tax return. Losses reported on an S corporation shareholder’s tax return may be advantageous when used to offset other income or a spouse’s income when a joint tax return is filed.

Business Expenses
An S corporation can offer self-employment tax savings, since owners who work for the business are classified as employees.  In an S corporation, only earnings actually paid out to an owner as compensation for services (as an employee) are subject to payroll taxes.  Any money left in the business for reinvestment or distributed to the shareholders as dividends is not subject to payroll taxes…and also not subject to self-employment tax.  S corporations have the ability to write off business expenses such as the cost of paying rent on an office. Additionally, the taxable gain on the sale of an S corporation business may be less than if the corporation was operated as a regular C corporation.

Stock
S corporations benefit from the ability to raise capital by issuing stock to potential investors.  Issuing stock allows an S corporation to meet existing obligations and to raise money for expansion and growth. This is an important consideration when setting up your business. If you foresee the capacity for growth; you’ll want to set up as an S corporation.  Other business types including a limited liability company or a sole proprietorship do not legally have the ability to issue stock as a means of raising capital.

Lifespan
An S corporation benefits from having an endless lifespan. Regardless of who owns the S corporation at any moment in time, the company will continue to exist. Since an S corporation is an entity completely separate from the owners of the business, the death or retirement of a shareholder will not stop it from continuing its operations. Other business entities such as a sole proprietorship end automatically if a business owner dies or decides to retire.

For help with setting up your S corporation, or any of your business needs, Wallace & Associates provides a wide variety of tax, accounting, and planning services.  

Wallace & Associates serves the greater Los Angeles area, including: Beverly Hills, Burbank, Calabasas, Culver City, Downtown LA, Encino, Granada Hills, Hollywood, Malibu, North Hollywood, San Fernando Valley, Santa Monica, Sherman Oaks, Studio City, Tarzana, Valley Village, West Los Angeles, Westchester.