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Pros and cons of S Corporation

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:

  1. Management and shareholders have limited liability.
  2. There is no limit to the number of managers and there is no state residency requirement.
  3. 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.
  4. Excellent privacy protection, particularly in Nevada and Wyoming.
  5. Flow-through taxation occurs when profits are distributed to shareholders, who are taxed on profits at the individual level.
  6. 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:

  1. Shareholders are subject to seizure and sale in court processing at the shareholder level.
  2. Only one type of stock is permitted.
  3. Owners/employees who own 2% or more of the company stock are not eligible for tax breaks.
  4. 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 impose a five-year waiting period to regain tax status.
  5. 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.
  6. High-income shareholders will pay more taxes on their distributions because flow-through taxes will be paid at the personal rate.
  7. A maximum of 100 shareholders, all of whom must be us, citizens, or permanent residents. Except in exceptional circumstances, the share must be held directly.
  8. 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.

Thank you for reading this article. If you have any queries regarding our article on the pros and cons of S Corporation then do comment in the comment section below.

Explore more information:

  1. Pros and cons of LLP
  2. Pros and cons of LLC
  3. Pros and cons of partnership

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Divya Chauhan
Divya Chauhan is an expert writer with 10+ years of experience as a content writer. They specialize in making complex topics like IT, Health, and general topic easy to understand. Divya has written over thousands of articles to help people with their content. Prior to joining Way2benefits’s editorial team in 2020, Divya worked as a Professor of BCA college and freelancer blogger.