An S corporation is a business that has chosen to be taxed as a flow-through entity. The letter S also stands for IRS code section. The selection allows shareholders to be fixed only as individual levels rather than both corporate and individual levels, avoiding double taxation as with the C corporation. There is no federal income tax levied at the corporate level, as opposed to C corporations. In addition, which are taxed at both the corporate and individual levels, earning the monitor double taxation. So here this article provides insights on the pros and cons of S corporation to better understand this topic.
Pros of S corporation:
- Management and shareholders have limited liability.
- There is no limit to the number of managers and there is no state residency requirement.
- A distinct, court-recognized existence that protects you from personal liability. In addition, that could cause you to lose your personal wealth in assets such as your home, car or nest egg.
- Excellent privacy protection, particularly in Nevada and Wyoming.
- Flow-through taxation occurs when profits are distributed to shareholders, who are taxed on profits at the individual level.
- Excellent income sharing potential for owner/employees. can take a lower salary, pay income taxes and regular payroll deduction and then take the remaining profit as a distribution to income tax only.
Cons of S corporation:
- Share are subject to seizure and sale in court processing at the shareholder level.
- Only one type of stock is permitted.
- Owner/employees who own 2% or more of the company stock are not eligible for tax breaks.
- If a non-resident stockholder or stock placed in the name of a corporate entity jeopardizes tax status, The IRS will revoke, charge back taxes for three years, and impost a five-year waiting period to regain tax status.
- It is not appropriate to hold an appreciating investment. Capital gains on asset sales will be taxed at a higher rate than with other pass-through entities such as LLCs and limited partnerships.
- High-income shareholders will pay more taxes on their distributions because flow-through taxes will be paid at the personal rate.
- Maximum of 100 shareholders, all of whom must be us, citizens, or permanent residents. Except in exceptional circumstances, the share must be held directly.
- Because control is ultimately in the hands of the stockholders. It is suitable as an estate-planning vehicle, in a planned gifting scenario, once majority control is transferred from parents to children, the children can take full control of the company.
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