Did you know there are more than 28 million small businesses in the United States? It’s true – and this number continues to grow, year after year. Are you thinking about joining this elite group of entrepreneurs? If so, you will quickly discover there are some extremely important decisions you must make. One of these is the type of business you want to form. Some of the most common options include sole proprietor, partnerships, LLC, S corp and more.
The option you choose is likely going to be dependent on the goals you have for your business, and other factors. Here, you can learn more about the benefits offered when you opt to create an S-Corporation. Being informed and knowing what this has to offer can help you decide if this is the option that is best for you and your business – now and in the future.
Similar to an LLC (limited liability corporation), the S-Corporation doesn’t pay any taxes on the corporate level. All losses and income are reported on your personal income taxes. This helps you avoid the problem related to double taxation, which affects the C-Corporation organization.
Because the net losses are actually “passed through,” individual shareholders are often able to reduce their liability, which is possible by offsetting the other income with the S-corp losses. There is one important caveat, though. A shareholder working for the company has to pay themselves a reasonable compensation. This means the shareholder has to be paid their fair market value, and if this doesn’t happen, the IRS may reclassify the extra corporate earnings as being “wages.”
Limited Liability for the Actions of Your Business
In reference to information provided by the IRS, an S-Corporation is considered a unique entity that is completely separate from its owners. Owners of an S-corp have only limited liability for any actions of the company. What this means is that owner are not able to be considered or held responsible for the debts or actions of the business unless they have opted to sign a personal guarantee.
Avoid Paying Self-Employment Taxes
When you own an S-Corporation, you are considered to be an employee of the company, rather than the owner. As a result, the “owners” of any S-Corporation can skip out on the self-employment taxes that an LLC member would otherwise have to pay.
Planning Ahead Thanks to Reduced Taxable Gains
Are you opening your business with the intention to sell down the road? If so, then there’s another reason to choose an S-Corp. When you finally sell your company, the taxable gains from this sale are often much less than they would be if you opted to sell a C-Corp.
The S-Corp is Easy to Mold
When you begin your business, you have all the best intentions to run it and stick with it over the years. At some point something may come up, resulting in you having to transfer the ownership of it. In some options of incorporation, this may result in quite a bit of additional hassle. However, when it comes to an S-Corp, the ownership can be easily transferred when you sell the company stock.
As you can see, when you begin building your business, you have options. However, one that makes more sense (in many cases) than others, is the S-Corporation. If you still aren’t sure whether or not this is the right formation for your business, it may be beneficial for you to speak with a professional. They can help ensure you make the right decision for your wants, needs and future plans for the business you have begun.