Advantages for S-Corporations

If you are going to be incorporating your small business, one of the choices that you have is to form an S-Corporation. An S-corporation is not the same thing as a C-Corporation, but before you can elect to become an S-Corporation, you have to be registered as a C-Corporation, so the incorporation process is the same.

To help make the decision on whether you should form an S-Corporation or not you will need to know about the advantages of forming an S-Corporation for your business. Here is a look at the advantages that your small business will have if you elect to form an S-Corporation instead of any other type of corporation.

Number one: Corporate losses
Perhaps the best advantage that an S-Corporation has over a regular corporation is that any corporate losses can be passed through to the shareholders. This cannot happen in a C-Corporation because within a C-Corporation, the corporation is taxed on its revenue and the shareholders are axed separately on their earnings, which results in the double taxation that people are afraid of with corporations. In an S-Corporation, this is not possible because the taxation of the S-Corporation is more like that of a partnership or a sole proprietorship, pass through taxation. By using pass through taxation if the corporation is dealing with a loss and you are the only shareholder you can take that loss against any income that appears on your personal income tax return. If your business is a C-Corporation the corporation files its own return, so the loss just goes on the corporation's tax return, you cannot benefit from the loss.

Number two: Protection
One of the biggest reasons that people elect to form a corporation is for the protection that corporations provide for personal assets. The corporation is its own legal entity; therefore, it is legally responsible for any debts and liabilities that it incurs. The problem with forming a C-Corporation for a small business is that you have to pay the higher corporate taxes just to get that protection. If you elect to become an S-Corporation you can still get the same protection, but you will be able to avoid paying corporate taxes.

Number three: Self-Employment Taxes
As a business owner if you have a partnership or a sole proprietorship you will be responsible for paying self-employment taxes on any profit that your business earns because it will be reported as income on your personal tax return. If you form a corporation, you will not be responsible for the self-employment tax because the corporation will pay your employment taxes because you will be paid a salary. One idea that people have is that forming an S-Corporation results in paying self-employment taxes because the S-Corporation allows pass through taxation. While the S-Corporation allows pass through taxation you can still minimize any self-employment tax that you would owe because your profits are not taxed in that manner because like the corporation shareholders of an S-Corporation are paid a salary, so the corporation pays the employment taxes.

Number four: Capital
If you have ever tried raising capital for a partnership or a sole proprietorship you are already aware of how hard it can be to raise that capital. Some of the reason that it is so hard is that people do not take your business seriously. B forming an S-Corporation you will be taken more seriously because the corporation status will add legitimacy to your business. Another reason why it is easier to raise capital with an S-Corporation is that you can raise equity capital by sharing shares of stock for your corporation, which does not have to be repaid nor will it accrue interest, making it the safest capital to raise.