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.
Why Is Google Getting Serious About Hardware?
Why Is Google Getting Serious About Hardware? Everyone knows Google is the leading search engine, but its ventures into hardware have so far been a mixed bag of results. The company made its intentions clear back when the smartphone era was in its infancy, declaring it would not get into the business of making hardware.…
The Most Valuable Coins in the U.S.
The Most Valuable Coins in the U.S. Are you a coin collector? Maybe you’re looking for a new hobby and valuable coins sounds like it could be right up your alley. Some collectors do it simply for a hobby, while others collect with a goal to make money. Whatever the reason, any coin collector can…
Best Amusement Parks to Visit This Fall
Best Amusement Parks to Visit This Fall Summer is over and vacation season has come to an end, but that doesn’t mean you won’t have any future opportunities for a getaway this fall. There are some great places you can visit if you’re looking for a little break from the ordinary this fall, including numerous…
Top Diets for 2017
Top Diets for 2017 What’s the best diet plan in the world? The answer to that question all depends on whom you ask. Perhaps the real question is do diets even work at all? There are countless studies that say otherwise. However, in reality, we all have a diet. Even if your diet consists of…