Are you wondering what S Corporations are and how they are taxed differently than other corporations? In this article, we’ll explore the basics of S Corporations and the unique ways in which they are taxed. Get your questions answered and learn all about the advantages and disadvantages of S Corporations.
How an S Corp Is Different From a Regular Corporation
The primary difference between an S-Corp and a regular corporation is the way they are taxed. A regular corporation is taxed as a separate entity, and the owners are taxed on their respective shares of the profits.
An S Corp is taxed like a partnership. The S Corp itself is not taxed, but each shareholder is taxed on the portion of the profit that he or she gets. The profits are distributed to the shareholders according to the percentage their ownership shares represent.
Another difference between an S Corp and a regular corporation is that you can only have one class of stock. In an S Corp, the profits are allocated to the shareholders according to each person’s ownership share. You cannot set up different classes of shares for the members and assign certain privileges to some while denying them to others.
Tax Advantages of an S Corp
The S-Corp has tax advantages, some of which are:
1. Tax savings on your social security and Medicare taxes. S Corps are not subject to the self-employment tax, which applies to sole proprietors.
2. Avoidance of double taxation. In a regular corporation, the corporate entity is taxed separately from its owners, and you will be taxed twice if the company pays dividends to you or distributes your salary income to yourself as well.
The Disadvantages of an S Corporation
Although S-Corps have several advantages, they are not necessarily the best option for every business. Some of the disadvantages of S Corps include:
1. The cost of establishing an S Corp is greater than the cost of establishing other types of corporations because there are more tax forms that need to be filed.
2. S Corps are not as flexible as other types of corporations. You must have an equal number of shareholders, and they must be individuals. You cannot have partners in an S Corp.
3. S Corps may not be the best choice if you plan to take out loans. Banks look at your personal assets as well when you apply for a loan, and if your business is an S Corp, your shareholders’ personal assets are in jeopardy.
Are S Corps Good for Small Businesses?
S-Corps are quite popular with small businesses that are just starting out. The tax savings that you can get through an S Corp will help you keep more profits in your business without being taxed as a separate entity.
You can change your entity to a regular corporation if you start earning more profits or if you have plans to do some additional funding. Until then, you can start your business as an S Corp and enjoy tax savings.