S Corporations, S-Corp

An S corporation begins first as a C corporation, eligible companies then file an S election to make the change. S corporation owners enjoy the same limited liability as C corporations. The basic difference is in the eyes of the IRS, while legally still a separate entity, S corporations generally do not pay income tax, their profits and losses are reported on a information return and then transferred to shareholder’s personal income tax returns.

Advantages of S Corp:

Owners can write off corporate losses against their personal gains and losses from other sources. After taking what the IRS calls “reasonable compensation” for their efforts shareholder employees can take the rest of business profits out as distributions subject only to their personal income tax rate (saving plenty on employment taxes and avoiding double taxation).

Disadvantages of S Corp:

Ownership less flexible than that of C corporations and LLCs, the IRS places restrictions on how many and what types owners are allowed. S-Corps also must observe the same formalities as a regular corporation in order to maintain “corporate veil”. Depending on your personal tax situation highly profitable S corporations are exposed to initially higher personal income tax rates.

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