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What are some advantages and disadvantages to an S-corporation?

Small business owners in Moorestown have a variety of ways they can form their business. Those who might want to incorporate may be more interested in a S-corporation, rather than the standard C-corporation. But, is this type of business formation right for everyone?

One business entity that may be better suited for some small business owners than a C-corporation is an S-corporation. The reason for this is that there are tax advantages associated with S-corporations, and the owners of the small business can still enjoy the protection from liability found in C-corporations.

In an S-corporation, both the income the small business generates, as well as the losses the small business incurs, are passed on to the business's shareholders. The shareholders then include the applicable income and losses on their personal tax returns. This means that federal tax for the business is paid once.

There are certain requirements that must be met for a small business to qualify as an S-corporation. First, the number of shareholders the small business can have must be under 75. Spouses count as a single shareholder in S-corporations. Moreover, only certain entities can serve as shareholders for the S-corporation. This includes individual people, certain types of partnerships, estates, charities that are tax-exempt and other S-corporations, so long as that S-corporation is the only shareholder.

In addition, if the S-corporation does not have any inventory, the accounting method they can choose is cash accounting, rather than the accrual method of accounting. In the cash method, income earned by the S-corporation is simply taxed when received and expenses incurred by the S-corporation are deducted when paid.

There are some disadvantages to S-corporations. They must meet the same criteria that standard corporations must meet, which translates to higher costs for certain services needed, such as those provided by tax professionals and attorneys. An S-corporation is also required to file articles of incorporation.

These are only some advantages of S-corporations. There are disadvantages to S-corporations that go beyond the scope of this blog post. Small business owners who are considering becoming an S-corporation may want to consult with an attorney, so they can make an informed decision about whether an S-corporation is right for them.

Source: Entrepreneur, "Subchapter S Corporation," accessed Jan. 28, 2017

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