What are the benefits of an S corp.?

When business owners choose an S corp., it’s for the tax benefits.  S corps. are more rigid and require more paperwork than LLCs, but they pay significantly less in employment taxes, which makes a big difference for highly profitable businesses.  S corps. are beneficial because they:

  • Have a lower initial filing fee;
  • Only pay employment tax for employee wages, not their entire net income;
  • Can write off certain employee/shareholder benefits for more savings;
  • Exist in perpetuity, making it easier to continue operating if a shareholders dies, sells his or her shares, or leaves the corporation;
  • Have clearer lines between the business entity and its shareholders;
  • Seem more legitimate to investors, who view the corporate structure as more stable; and
  • The paperwork resulting from required corporate formalities serves as great evidence of prudent business decisions in the event of a lawsuit

The downsides to S corps. are the restrictions, which include limitations on membership, investments, and types of stock.  S corps. must be managed by a board of directors, not the shareholders, and are required to observe corporate formalities.  If an S corp. fails to meet all of its entity requirements, it converts to a C corp. and loses its tax benefits.

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