An S-Corporation provides many benefits to small business owners, largely in the form of tax savings. S-Corps also provide an organized structure to build a business. This article explores the basic tax and legal distinctions of an S-Corp, in relation to other business entities.
An S-Corporation follows the same structure as a C-Corporation. When you set up your business entity, you must establish your Articles of Incorporation as well as your bylaws. You will issue stocks to assigned shareholders, and name your directors and officers. If there are other partners in your business, you will be able to designate and assign work amongst them by assigning titles. You also have to plan annual meetings with your shareholders, officers and directors of your company.
S-Corporations exist perpetually, regardless of what happens to members or shareholders. When a member of the S-Corp leaves or dies, the S-Corp will continue to exist. Business continues to operate, and the members decide how they want to reallocate or restructure the business.
Transfer and Assignment
S-Corporations accommodate the transfer of ownership via stock shares. Some business entities without shareholders find it difficult to transfer portions of ownership. An S-Corporation allows shareholders to transfer, gift or sell their shares without disturbing the business itself.
S-Corporations provide a corporate liability shield that protects personal assets. S-Corporations, like most business entities, will shield you from personal liability. This is one of the most important reasons that businesses choose to incorporate. Your personal assets, including your home and your personal funds, are out of creditors’ reach, in the event of litigation or default, as long as you operate as a corporation.
*Remember that you are only shielded if you do your due diligence and act like a corporation. If that is not the case, opposing parties can “pierce the corporate veil”, meaning they can demonstrate that even though you are a corporation, you are not acting as such, and therefore your personal assets can be addressed in legal proceedings. Make sure not to co-mingle your personal and business funds. Remember also to maintain proper corporate records.
S-Corporations can provide tax benefits and savings. Corporate earnings that are returns on investments are not subject to a self-employment tax, as long as stockholder employees (including yourself) receive adequate and fair compensation.
Check out this link to a CPA’s blog regarding how much a company can save with an S-Corp, as opposed to a sole proprietor. S-Corp losses can be used as tax deductions on the shareholder’s personal income tax returns. Also, the federal government does not tax S-Corporation profits.