Having insight into the advantages and disadvantages of an S corp can allow you to make an informed decision as whether or not to make an S corp election.This will vary from business to business with many different factors impacting the decision.
Advantages of an S Corporation
✔ Flow through taxation: Having a company taxed as an S corp is the main advantage to using this election. Double taxation that affects C corporations is avoided, as income and losses flow through to shareholder owners. LLCs taxed as an S corp will also be taxed with flow through taxation and help member owners minimize self-employment taxes.
✔ Access to a state’s court system: Being able to use the state’s legal infrastructure for business disputes.
✔ Flexible compensation: Shareholder owners can receive both salaried compensation as well as dividends.
✔ Limited Liability Protection: Owners personal assets are protected from business and other creditor claims.
✔ Accounting Flexibility: S corporations are able to use cash basis accounting and are not bounded to the accrual method like most traditional corporations are.
Disadvantages of an S Corporation
✔ Restricted and Limited Ownership: An S corporation cannot have more than 100 owners and cannot be owned by non US persons.
✔ Limitations of benefits: Fringe benefits such as a company car and expense account are considered compensation for employees and shareholders.
✔ Extra administrative responsibilities: Formalities such as recording of minutes and shareholder meetings are required.
✔ Limitation of stock classes: Unlike most traditional C corporations, S corporations are limited to one class of stock.
These advantages and disadvantages must be weighed against each other to see if they meet the overall ethos and vision of the business. It should be kept in mind that there will be ongoing requirements and considerations for the S corporation to keep running and those responsibilities must be taken into account.