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ENTREPRENEUR RESOURCE CENTER
Business Legal Structure: S-Corporation
S-corporations (Subchapter corporations) are attractive to new businesses, which often generate losses in the first few years of operation. These losses can offset other taxable income for individuals, subject to certain limitations. Corporate shareholders can write off their share of operating losses against their income to the extent of their investment. By linking corporate income to personal income, wealthy investors receive the benefit of a tax write-off while eliminating the "double tax" liability often associated with C-corporation status. Because of these tax advantages, the S-corporation has become the preferred structure for many small businesses.
The advantages of an S -corporation:
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Easy to establish, one person can form an S-corporation. |
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The shares are freely transferable, i.e. the shareholders of S-corporation are able to sell their interest without obtaining the approval of the other shareholders. |
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Limited liability of stockholders. As in C-corporation, the S-corporation shareholders are not personally liable for the debts of the corporation. |
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Avoid corporate taxes (and its resulting double taxation). Pass-through taxation allows the income or loss generated by the business to be reflected on the personal income tax return of the owners. This tax status eliminates any possibility of double taxation for S corporations. |
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The corporations have unlimited life extending beyond the death or incapacitation of its owners. |
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Additional capital can be raised by selling stock. |
The disadvantages of an S- corporation:
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The ownership of an S-corporation is restricted to no more than 75 shareholders. |
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The S-corporation must be individuals, estates or certain qualified trusts and cannot be owned by non-resident aliens, C-corporations, other S-corporations, LLCs or partnerships. The shareholders must consent in writing to the S-corporation election. |
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S-corporations can only have one class of stock and your percentage of ownership determines the percentage of pass-through income. |
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For small business, S-corporation is more expensive to form and operate than sole proprietorships and partnerships as there are more state and federal rules and regulations than with sole proprietorships and partnerships. |
For more information, please refer to:
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