The Advantages and Disadvantages of an S-Corp Tax Election

When starting a business, there comes a time when you need to determine the type of legal entity it should be. This will have many implications for the business, especially when it comes to how taxes need to be paid. For many entrepreneurs, an S-Corp seems to be the ideal solution, and in many situations, it really is. Understanding the advantages and disadvantages of an S-Corp can help you to make the right decision for the future of your business.

Advantages of an S-Corp

Choosing an S-Corp is a great option for many people starting a business. There are a variety of advantages of going this route, including the following:

  • Asset Protection – The assets of the shareholders of the S-Corp will be protected. If the business goes under, gets sued, or runs into any other issues, the shareholders won’t have to pay out of their own pocket.
  • Pass-Through Taxation – Any profits or losses from an S-Corp can ‘pass through’ to the shareholders, and be handled on their personal income tax returns. This is a much easier option, and can provide tax benefits to shareholders in many instances.
  • Characterization of Income Options – The shareholders are permitted to list themselves as employees of the S-Corp, and draw salaries. They can also choose to receive dividends from the company. This makes it possible for the shareholders to decide which payment options are best in their case, and take advantage of them.
  • Easy Ownership Transfer – Shareholders can sell their position in the company easily with minimal legal implications to the business itself. Compared with LLC’s, this is a far simpler option.

Disadvantages of an S-Corp

The advantages of an S-Corp are significant, but it is important not to overlook the disadvantages when making a final decision:

  • Formation – Forming an S-Corp is more difficult than an LLC since you have to file articles of incorporation, identify a registered agent, pay the fees, and take a variety of other steps. In most cases, this will be handled by an attorney.
  • Limited Stock Types – There can only be one class of stock available for the S corporation.
  • IRS Attention – The IRS tends to put more scrutiny on S-Corporations than they do LLCs due to the additional payment options and other factors.

Contact Us

If you have questions about whether or not an S-Corp is right for you, or you would like to get the process of incorporating your business started, please contact APH Law, PLLC today. We’ll be happy to go through all your options and help you decide the best way to move forward.

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Written by APH Law PLLC

APH Law PLLC

When we founded APH Law PLLC in 2010, we did so out of a desire to connect business owners with more and better opportunities. No matter what industry you’re operating in, creating a strong foundation, preparing for the future, and protecting against challenges are key to long-term success. It is this kind of support that we take tremendous pride in helping businesses.