June 18, 2015 en_US https://quickbooks.intuit.com/cas/dam/IMAGE/A4s85nCXG/317aeffa654537f49e6ab656c35b4ca1.png https://quickbooks.intuit.com/r/structuring/whats-an-s-corporation-and-is-it-the-best-option-for-your-business What’s an S Corporation, and Is It the Best Option for Your Business?

What’s an S Corporation, and Is It the Best Option for Your Business?

By QuickBooks June 18, 2015

An S corporation combines the limited liability protection of C corporations with the taxation benefits of a sole proprietorship, partnership or LLC. Some states, such as New York and New Jersey, do not recognize S corporation status and treat them like a C corporation. To learn about different business structures, check out our video series on choosing the right business entity for you.

A corporation must meet all of the following requirements to be eligible for IRS S corporation election:

  • Must only have one class of stock.
  • Must not have more than 100 shareholders.
  • All of the shareholders must be U.S. citizens or U.S. permanent residents.
  • All of the shareholders must be natural persons (i.e. other corporations, LLCs and partnerships are generally excluded).
  • Profits and losses must be allocated to shareholders proportionately to their ownership interests.

Check out the video below for a quick overview of S corporations, and continue reading for more info.

What Are the Benefits of S Corporations?

The benefits of S corporations include:

  • Limited liability: If corporate formalities are followed, shareholders will not be personally liable for the debts and obligations of the S corporation beyond their initial investment.
  • Preferable tax treatment: Business profits and losses “pass through” to each shareholder’s individual tax return, meaning they aren’t subject to the double taxation of C corporations.
  • Reduced self-employment taxes: If shareholders also work for the business, they could enjoy reduced self-employment taxes.

Why Should I Think Twice About S Corporations?

S corporations do have some disadvantages, such as:

  • Strict corporate formalities: Among other requirements, S corporations must have annual directors meetings, annual shareholders meetings, maintain corporate minutes and maintain a separate bank account.
  • Costly and tedious to set up: You have to file forms with your state and shell over a few hundred dollars to get started. You also have to elect S corporation status with the IRS.
  • Ownership restrictions: Only natural persons can be shareholders with maximum of 100, which could be troublesome if the business wants to bring in investors or go public.

S Corporations: The Best of Both Worlds

If you are interested in creating an S corporation, read our step-by-step guide. For a general summary of different business entities, see our video series on the different types of business structures.

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