Subchapter S Incorporation Advantages and Disadvantages

There are a number of options for business owners to consider when incorporating. You should be familiar with all of them because they are all a little bit different. Subchapter S, or S Corporations are created after an application to the IRS is approved. If you want to read more about what an S Corporation is click here.

Advantages to S Corporation (Subchapter S) Incorporated Companies:

No Corporate Taxes: Perhaps the most valued advantage to having a subchapter s corporation concerns the tax advantages. Company profits and losses are paid on the owners’ personal income tax. What this means is – if the s corporation paid you $12,000 for the year and yet has made $60,000 of which $48,000 remains in the business checking – the taxes are on $12,000 at the personal tax rate.

This is similar to a LLC, taxes “pass through” and allow you to avoid any “double taxation”.

Reduce taxable gains when selling your business. This can be part of good planning for your retirement as you’ll save considerably.

Losses incurred during start-up can be written off. These can be written off against your personal income.

Protection of assets… liability protection: S corporations offer protection against some liability. However, you remain personally liable for your actions in the case of fraud, intentional harm or anything else the court rules.

Disadvantages of Subchapter S corporation entities:

Less Stock Issuing Options. Subchapter S corporations are limited to one class of stock.

Venture Capital Issues. Venture capitalists are less likely to be interested in funding your growth because of the pass-through tax structure and the limit of 75-100 shareholders.

Corporate Meetings and Minutes. Some additional time is necessary for administrative tasks.

More Subchapter S Information:

Subchapter S Versus LLC Showdown… – For many new Illinois businesses the choice will come down to these two types of corporations.

What is a Subchapter S (S Corporation)? – Subchapter S is an IRS designation for a Profit Corporation that distinguishes it…

Incorporate your Subchapter S – (S Corporation) online now.

What is a Subchapter S (S Corporation)?

Subchapter S is an IRS designation for a Profit Corporation that distinguishes it from other types of corporations.

The IRS.gov site says of S Corporations (Subchapter S corporations)…

An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.

Investorwords.com says of Subchapter S incorporation…

A form of corporation, allowed by the IRS for most companies with 75 or fewer shareholders, which enables the company to enjoy the benefits of incorporation but be taxed as if it were a partnership. Subchapter S corporations are also called S Corporations or S Corps.

Wikipedia clip about Subchapter S companies…

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.

An overview of S corporations

S corporation status provides many of the benefits of partnership taxation and at the same time gives the owners limited liability protection from creditors.

Like a C corporation, an S corporation is generally a corporation under the law of the state in which the entity is organized. S corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the shareholders of C corporations. For Federal income tax purposes, however, taxation of S corporations resembles that of partnerships. As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made. Thus, income is taxed at the shareholder level and not at the corporate level. Payments to S shareholders by the corporation are distributed tax-free to the extent that the distributed earnings were previously taxed. Also, certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S corporation.

Subchapter S or S-Corporations are commonly chosen forms of incorporation for small businesses.

More Subchapter S Information:

Subchapter S Versus LLC Showdown… – For many new Illinois businesses the choice will come down to these two types of corporations.

Subchapter S Incorporation Advantages and Disadvantages – There are a number of options for business owners to consider when incorporating.

Incorporate your Subchapter S – (S Corporation) online now.