1. Limited Liability Protection
- Just like C Corporations and LLCs, shareholders in a S Corp are not personally liable for the debts and obligations of the business.
- Protects personal assets from lawsuits and business creditors
2. Pass-Through Taxation (No Double Taxation)
- Just like C Corporations and LLCs, shareholders in a S Corp are not personally liable for the debts and obligations of the business.
- Protects personal assets from lawsuits and business creditors
3. Potential Savings on Self-Employment Taxes
- Shareholders who work for the company are considered employees and must be paid a "reasonable salary".
- Remaining profits (after salary) can be distributed as dividends, which are not subject to self-employment tax (15.3%).
- This structure can lead to significant tax savings, especially for profitable businesses.
4. Credibility and Professionalism
- Operating as an S Corp can boost your business credibility whit customers
- Shows a higher level of formality and permanence.
6. Deductible Business Expenses
- Shareholders/employees can deduct ordinary business expenses, including salaries, rent, utilities, and more.
- Certain fringe benefits may also be deductible (though not as extensive as C Corps).
5. Transfer of Ownership
- Ownership in an S Corp is easier to transfer than in a LLC (no need to dissolve and reform the entity).
- However, ownership transfers are subject to restictions (see limitations below).
7. Can Help Avoid IRS Scrutiny
- Being on a payroll with a W-2 salary looks more formal and may reduce audit risk compared to sole proprietorships or single-member LLCs.
Important S Corporation Limitations
- 100 shareholder limit
- Shareholders must be U.S. citizens or residents
- Can only have one class of stock
- All shareholders must agree to S Corp election
- Must file Form 2553 with the IRS to elect S Corp status