An
S Corporation ("S Corp.") is an ordinary business corporation that has
elected to be taxed under Subchapter C of the Internal Revenue Code. It
is not taxed on its earnings as a corporation, but instead its earnings
are passed through to its shareholders for tax purposes.
In
general, S Corporations do not pay any income taxes. Instead, the
corporation's income or losses are divided among and passed through to
its shareholders. The shareholders must then report the income or loss
on their own individual income tax returns.
Advantages:
-
It
is a separate legal and tax entity from its owner(s). Be sure to always
consult your accountant since tax laws change with time and
jurisdiction.
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The
corporation will grant you shares. As a shareholder, you are not liable
for the debts or acts of the corporation as long as you obide by the
corporate procedures required by law. The most you can lose as a
shareholder is the amount you have paid for your shares. This means
that if the corporation is sued and losses, they cannot take your home
and your personal car and assets.
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You
are regarded as more professional and business-like if you are a
corporation. Venture capital and investors usually prefer to invest in
corporations as they provide the most flexible and consistent
procedures for business and investment.
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If
you are a S corporation, you are not subject to the double taxation
which can occur when a corporation pays income tax and then
shareholders pay tax on dividends as well. There are also other tax
benefits.
Disadvantages:
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May
have no more than 75 shareholders, may have only one class of stock,
may not own more than eighty percent of another corporation, and may
not have shareholders who are not US citizens or resident aliens.
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The
costs and effort of maintaining a corporation are higher than some
other business forms due to legal requirements about an annual
shareholder meeting, corporate minutes and other procedures which must
be followed.
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Corporations
which has an office in a state other the one its incorporated in must
register as a foreign corporation in that state. The cost of
incorporation, maintaining an agent for service (a person to receive
legal documents required by law), registered as a foreign corporation
and upkeep of corporate procedure documents is higher than some other
forms of business.
