Benefits of S-Corporation
S-corporation is distinct legal entities created under State Law. It helps to protect the business owners to separate themselves, legally and financially from creditors and lawsuits seeking financial compensation from the company. S-corporations require a substantial level of compliance which establishes the dividing line between the corporation and its shareholders. One of the basic advantages of S corporation is a smooth change of ownership in case of death of its shareholder without disturbing the business operation.
There are two prominent forms of ownership: Corporations and Limited Liability Companies (LLC’s). Corporation’s status is usually better suited to large businesses while LLC’s (limited liability companies) is better suited for smaller and newer business establishments. Though, each will provide the needed liability protection.
If you are starting a business, you’ll need to choose your business entity for legal and tax purposes. There are several business entities in the US, each with their own benefits and drawbacks. If you have a larger business, an S-Corporation, or S-Corp, may be a good potential choice. Here are some of the benefits of an S-Corporation:
The key requirement of S corporation status:
The corporation must meet the following requirement.
- It must be a domestic corporation
- It must have only one class of stock
- It should not have more than 100 shareholders
It should be ineligible corporation i.e. certain financial/insurance/domestic international sales companies.
Asset Protection: Like most standard corporations, having your business registered as an S-Corp helps protect the assets of shareholders against company liability. For instance, if the company issued, or goes into debt, you, as a shareholder, or even an owner, cannot be held personally liable for the damage. So, even if your company fails, your personal assets are off-limits.
Lower Taxes: Another potential benefit of an S-Corp is the option of “pass-through” taxation. Standard corporations are taxed as entities before the shareholders are taxed on their personal assets. This is called double taxation and is generally considered unfavorable because your income is taxed twice. Meanwhile, S-Corporations enjoy what is referred to as “pass-through” taxation where individual members of the corporation are taxed but are not the corporation as a whole.
Starting an S-Corp: Whether you are starting out, or would like to change the legal entity of your current business to that of an S-Corp, you will need to file the appropriate forms at both the state and federal levels. You will also need to know how to get a Tax ID number for your new entity. While you’ll have to file the state forms with an approved state institution, the federal forms for registering your S-Corp and for getting a new tax ID can be done online through a reliable site like Gov Doc Filling.
There are many more benefits to starting an S-Corp and the process is easier than you think.
Candid transfer of ownership: The transfer of more than a 50-percent interest can cause the termination of the entity in a partnership or an LLC while in an S corporation interests can be freely transferred without triggering adverse tax consequences. When an ownership interest is transferred S corporation does not need to adjust property or comply with complicated accounting rules.
The cash method of accounting: Usually corporations must use the accrual method (In this method: accounts on a balance sheet that represent liabilities and non-cash-based accounting) unless they are considered to be small corporations (Small corporations – gross receipts of $5,000,000 or less). But S corporations don’t have to use the accrual method unless they have inventory.
Intensified credibility: To establish the new business as an S corporation may help to improve owner’s credibility with their potential customers, vendors, partner and employees as they find owners have made a formal commitment to their business.
Favorable tax characteristics:
One of the strong merits of an S corporation is that shareholders can be an employee of the business and draw salaries and they can receive the dividends as well. Also, distributions as salary or dividends can help the owner to reduce self-employment tax liability and generate business-expense and wages-paid deduction for the corporation. Also, business losses can offset other income on the shareholder’s tax return which is extremely helpful for new businesses.