The Pros & Cons of S-Corporation Status
The Pros & Cons of S-Corporation Status
If the number of shareholders in your corporation is small, you may think that becoming an S-Corporation is the right move, but you should weigh the advantages and disadvantages first.
Advantages of S-Corporation Status
One of the main advantages of S-Corporation status is that it avoids the double taxation that occurs with a regular C-Corporation. In a C-corporation, the corporation pays income tax on its profits and, if those profits are distributed to shareholders, the shareholders pay income tax on the distribution.
Electing S-Corporation status passes the income or losses of the corporation to the shareholders who recognize the income or loss on their personal tax returns. This is an advantage if the corporation expects to show a loss at first. The loss can be used to offset the shareholder’s income from other sources, including a spouse’s income.
Disadvantages of S-Corporation Status
Passing income through to shareholders can be a disadvantage in some instances. If the business is profitable, shareholders will be required to pay income tax on their share of the profits, even if that money is not distributed to them. In a C-Corporation, profits can be used to expand the business and shareholders are not required to pay taxes until distributions are made.
Reasonable salaries paid to employees are deductible business expenses for S-Corporations as well as for C-corporations. However, in an S-Corporation, fringe benefits may not be deductible as they would be in a C-Corporation.
Even though losses pass through to shareholders in an S-Corporation, those losses aren’t deductible by shareholders who don’t materially participate in the business. This could result in higher taxes overall.
S-Corporation Requirements
Not every corporation qualifies for S-Corporation status. In order to elect S-Corporation status, the corporation can only have one class of stock. The corporation can have no more than 35 shareholders, although a husband and wife who both own shares will only be counted as one shareholder. No shareholder can be a nonresident alien or another corporation. All of the shareholders must consent to elect S-Corporation status. The corporation also cannot earn too much income from investments.
We hope you found this article about “The Pros & Cons of S-Corporation Status” helpful. If you have questions or need expert tax or family office advice that’s refreshingly objective (we never sell investments), please contact us or visit our Family office page or our website at www.GROCO.com. Unfortunately, we no longer give advice to other tax professionals gratis.
To receive our free newsletter, contact us here.
Subscribe to our YouTube Channel for more updates.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
Alan L. Olsen, CPA, Wikipedia Bio
GROCO.com is a proud sponsor of The American Dreams Show.
The American Dreams show was the brainchild of Alan Olsen, CPA, MBA. It was originally created to fill a specific need; often inexperienced entrepreneurs lacked basic information about raising capital and how to successfully start a business.
Alan sincerely wanted to respond to the many requests from aspiring entrepreneurs asking for the information and introductions they needed. But he had to find a way to help in which his venture capital clients and friends would not mind.
The American Dreams show became the solution, first as a radio show and now with YouTube videos as well. Always respectful of interview guest’s time, he’s able to give access to individuals information and inspiration previously inaccessible to the first-time entrepreneurs who need it most.
They can listen to venture capitalists and successful business people explain first-hand, how they got to where they are, how to start a company, how to overcome challenges, how they see the future evolving, opportunities, work-life balance and so much more..
American Dreams discusses many topics from some of the world’s most successful individuals about their secrets to life’s success. Topics from guest have included:
Creating purpose in life / Building a foundation for their life / Solving problems / Finding fulfillment through philanthropy and service / Becoming self-reliant / Enhancing effective leadership / Balancing family and work…
MyPaths.com (Also sponsored by GROCO) provides free access to content and world-class entrepreneurs, influencers and thought leaders’ personal success stories. To help you find your path in life to true, sustainable success & happiness. It’s mission statement:
In an increasingly complex and difficult world, we hope to help you find your personal path in life and build a strong foundation by learning how others found success and happiness. True and sustainable success and happiness are different for each one of us but possible, often despite significant challenges.
Our mission at MyPaths.com is to provide resources and firsthand accounts of how others found their paths in life, so you can do the same.
I Will be Better in 2023
Why I will be better in 2023 than I was in 2022. Every year, millions of New Year’s resolutions are made on January 1st, and like mine, many of them never make it past the 31st. But this year I want to be better: better at setting goals and better at reaching them. I made this resolution in…
The Amazing Visionary Mind behind Cave Financial
The Visionary Mind behind Cave Financial Michael Cave started Cave Financial over 20 years ago with the vision of providing families and businesses with assistance in creating, protecting, and preserving their wealth. After completing his education in accounting at Ball Corp, Michael gained experience working for various companies, such as Boeing Co. and Harley Davidson.…
Good Financial Planning Let’s You Live Your Lifestyle with Michael Cave, Managing Director of Cave Financial
Michael Cave, Managing Director of Cave Financial discusses how good financial planning can let you Live Your preferred lifestyle with Alan Olsen. Transcript (software generated): Alan Olsen Michael, for the listeners here. Can you give us your background and how you got to the point you are today? Michael Cave Yeah, well, I guess like…
Derek Lobo’s Brilliant “Self Funding House”: The Dream has Not Passed You By
Introducing Derek Lobo, author of Self Funding House Derek Lobo, CEO & Broker of Record of SVN Rock Advisors Inc., is a recognized housing expert in Canada’s expensive and highly competitive housing markets. As Derek puts it, the affordability gap between home ownership and renting has become a full-fledged crisis. Current interest rates are not…