Starting a business or corporation means taking much time to determine what the business will look like and how it will operate. Business planning and formation can get complex, especially when one thinks about it in the long run. And since there is no way around it, business owners will need to consider how the corporation will be taxing time to protect him or herself in the process.
An S corporation is formed for certain reasons. Many consider it to be beneficial because it allows it to be taxed much like partnerships when it comes to federal and state income tax purposes. When comparing it to a C corporation, there are many tax advantages that would cause someone to consider a S-corp over a C-corp.
What are the benefits and disadvantages of a S-corp? TO begin, there is a single level of tax. This means that the income of the corporation is generally just subject to one level of tax, which means that the income of corporation’s shareholders is taxed. With regards to a C-corp, the corporation pays tax on its earning on top of the shareholders paying a second tax when corporate earning are distributed to them in the form of dividends.
Another benefit is that there is the ability to share losses. This means that an S-corp is able to deduct their losses on their individual tax returns. Finally, an S-corp is able to do income splitting. This means that an S corporation can be used as a vehicle to split income among family member through gifts or by the sales of stocks.
While benefits exist, there are some disadvantages to having a S-corp. For starters, there is not an exclusion for up to 50 percent of the profits gained from the sale of qualified stocks. There are fewer tax-free fringe benefits. The stocks of a S corporation can only be transferred to eligible shareholders. It can complicate the estate planning process for shareholders, tax rates are generally higher for individuals and employee stock ownership plans are not available.
Forming a business requires much thought and planning. It also means considering the advantages, benefits, setbacks and disadvantages involved in specific business formations. Understanding these details could help determine which one is the best fit for you.