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The advantages of selecting an S Corporation include the following:
(1) Simple Taxation: (avoid getting taxed twice). In an S corporation, profits and losses are passed through to shareholders, and taxes are only paid once. Whereas a C corporation has to pay federal tax and tax on the dividends paid to share holders.
(2) Protection from liability.
As the owner of an S Corporation, your personal assets are separate from the business’s assets. This means your personal stuff is protected in case of a lawsuit.
(3) More room for investors: S Corporations can have up to 100 shareholders.
(4) Easier accounting rules: S Corporations without any inventory can use the cash method of accounting, which is much simpler than the accrual method. Check with your accountant about which option makes sense for your business.
The disadvantages are:
(1) Rules and fees: Like a C Corporation, S Corporations are required to file a number of official state and federal documents, including Articles of Incorporation and corporate minutes. They must also hold regular shareholder meetings and pay the required government fees.
(2) Shareholder restrictions: Realize that if an S Corporation has shareholders, the shareholders will be taxed for any income the company has, even if they did not receive any portion of that income. (In a C Corporation, shareholders are taxed only if they receive dividends.) In addition, S Corporations are only allowed to issue one class of stock, which may discourage some investors.
(3) Salary requirements: The Internal Revenue Service requires all officers and owners of an S Corporation to make a salary, even if the company is not yet making a profit. This could be problematic for new businesses struggling to make payroll. A “reasonable salary” is what a person with the appropriate skills needed for the position would be paid on the free market.
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