Benefits of an S Corporation

Creating an S corporation is one of the many options you have when establishing your business structure. If you opt for this common choice, you will notice several benefits. If you feel that these outweigh the drawbacks of this structure, then it is probably the right one for your business.

Some of the main benefits of an S corporation fall under tax benefits. There are several of these available in comparison to sole proprietorships, partnerships, and C corporations. The primary one is the payroll tax savings. The owner of an S corporation will not pay nearly as much in Social Security and Medicare taxes, which are lumped together as self-employment taxes for sole proprietors, because this business structure allows the total earnings to be lumped into wages and leftovers. These self-employment type taxes are only paid on earnings. This can be thousands of dollars less in taxes for a highly successful business.

Also, losses in an S corporation can be incorporated into the personal income tax returns of the shareholders. This is a benefit at the outset of a business particularly. The federal government also will not tax the S corporation profits. This may not be true on the state level.

Taxes are not the only benefits of an S corporation. Like the other structures, setting up an S corporation limits your business liability. Your personal risk in your business is much less than if you ran it as a sole proprietor or even a simple partnership. The shareholders in an S corporation cannot be held liable for the corporation’s debts because they are the owners, in most situations.

While these benefits are great, there are some distinct drawbacks. This is one of the most complex structures, both to set up and to manage. Because of this, most business owners do not consider it unless they stand to save thousands through the tax savings options. The extra costs for accounting and setting up the business in this structure can quickly eat up tax savings for businesses bringing in minor amounts of income.

This is also the most costly startup option. You have to meet the requirements of Section 351 of the IRS code, and this is costly. Before you jump into this structure as a way to save money on your business’s tax expenses, make sure you understand all of the costs involved, as well as the forms you will have to file to successfully create a business as an S corporation.