S-Corporation: Pros and Cons

When there is a small number of shareholders in a corporation, an organization may consider becoming an S-Corporation, although it is essential to weigh the pros and cons of the decisions. One of the main benefits of attaining the S-Corporation status is that a company can avoid double taxation occurring at C-Corporations. In the latter’s instance, a corporation pays income tax on all of its profits, and if the shareholders also get the profits distributed to them, they must pay income tax on such profits.

However, when choosing the S-Corporation option, the income or losses are being passed to shareholders recognizing the loss of income on their personal tax returns. This is advantageous in cases if a corporation expects to acquire a loss at the beginning stages of its business. However, the S-Corporation status can be disadvantageous if a company is highly profitable, with shareholders required to pay income taxes on their profit shares even if they had no funds redistributed to them. Besides, in the model, fringe benefits paid to employees or other expenses may not be deductible.

An LLC is different from an S-Corporation in several ways. An LLC is a business entity, while S-Corporation is an elected tax status. LLC owners are required to pay self-employment taxes for all income they receive, while S-Corporation owners pay less of the tax under the condition that they pay themselves a reasonable salary. Besides, an LLC is allowed to have any number of members, while S-Corporations are limited to one hundred shareholders. There are also differences in the management structure, with LLCs being managed as partnerships or sales proprietorships. An LLC is a preferred option when a company expects to incur debt or offer investors a preferred class of equity.

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