After managing a successful small business, you might consider going corporate. Turning your business into a corporation allows you to further expand your brand and make more money. Now, when you decide to go corporate, one question you may want to ask is whether you’d want to form an S-corp or stick to the standard C-corp? In order to know this, you must know the benefits and disadvantages of an S corp. This is where you’ll base your decision.
What Is An S Corp Anyway?
Before knowing the benefits and disadvantages, you must first understand what an S corp is and how it’s different from the standard one. Basically, an S corp is just like a standard one except with a special tax status. Instead of the corporation paying the income tax, the shareholders will shoulder it as personal tax. Also unlike a standard C corp, an S corp has stricter requirements with regard to ownership.
What Are the Benefits?
- An S corporation has limited liability to protect the individual shareholders from debts and liabilities.
- Since the shareholders shoulder the income tax, the company can save money.
- It allows for a better splitting of profits for the shareholders since only shareholders’ profits are taxable.
- The tax rate of an S corp is lower than a Personal Service Corporation, making it a good choice for service oriented businesses.
- Shareholders won’t need to pay any self-employment tax for their company profits.
What Are the Disadvantages?
- It is not allowed to have more than 100 shareholders and all must be citizens of the country where the corporation was created.
- Shareholders who own more than 2% are not eligible for tax free benefits.
- Shareholders may not want to have high salaries because they are taxed at a personal level.
- It is only allowed to have one class of stock.
Is an S-Corporation for You?
To answer this question, you must first ask yourself what type of company you’re putting up. After that, look at the benefits and disadvantages. If you want to make your small business a public listed company already, then an S-corporation is not for you. This is due to the limit to the number of shareholders being only 100. However, if you’re going to open up a small corporation that’s service oriented, then an S-corporation is the ideal business type to put up. An S-corporation allows you to pay smaller income tax.
The key to knowing if an S corp is for you or not is to simply analyze your business type first. If there are more benefits than disadvantages present for your business type, then open an S corp. If not, then you may want to consider opening a standard C corp instead.
In the end, your decision to make your small business an S corp or not will all depend on your business type and your business goals. If making an S corp is advantageous and supports your long term plans, then you should definitely turn your small business into one. If not, then consider trying a different move.