Is an S corporation is the most suitable form of business for your new venture? Today we are discussing some of the benefits of operating as an S corporation.
One of the biggest advantages of an S corporation over a partnership is that as S corporation shareholders you would not be personally liable for corporate debts (unless you signed a personal guarantee). In order to receive this protection, it is important that the corporation be adequately financed, that various formalities required by our state be observed (e.g., filing articles of incorporation, adopting by-laws, electing a board of directors, and holding organizational meetings), and that the existence of the corporation as a separate entity be maintained.
If you expect that the business will incur losses in its early years, an S corporation is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation generally get no tax benefit from such losses. In contrast, as S corporation shareholders, you can deduct your percentage share of these losses on your personal tax return to the extent of your basis in the stock and in any loans you make to the entity. Losses that cannot be deducted because they exceed your basis are carried forward and can be deducted by you when there is sufficient basis.
Once the corporation begins to earn profits, the income will be taxed directly to you whether or not it is distributed. It will be reported on your individual tax return and be aggregated with income from other sources. Your share of the S corporation’s income will not be subject to self-employment tax, but your wages will be subject to social security taxes. For this reason it is important to establish a wage commensurate with the services you provide as a corporate employee.
An S corporation could inadvertently lose its S status if you transfer stock to an ineligible shareholder such as another corporation, a partnership, or a nonresident alien. If the S election were terminated, the corporation would become a taxable entity. You would not be able to deduct any losses and earnings could be subject to double taxation-once at the corporate level and again at the shareholder level when distributed.
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