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Pros and Cons of S Corporations

December 2, 2010

Part of what GAI (www.gunwel.com) does re business consulting is helping clients figure out what kind of entity they should become in their business formation. We also form Corporations, Patnerships etc for our clients. As I list the Pros & Cons of S Corporations keep in mind that Congress may pass S Corporation reform that would eliminate or lessen some of the current advantages.

Some of the advantages  (PROS):

  • Your personal assets will not be at risk because of the activities or liabilities of the S Corporation.
  • Your S Corporation will not have to pay Corporate level income tax. Instead the Corporation’s gains, losses, deductions and credits are passed through to you and other shareholders.
  • The S Corporation also has no Corporate alternative minimum tax (AMT) liability (however, Corporate items passed through to you may affect your individual AMT liability).
  • FICA tax is not owed on the regular business earnings of the Corporation, only on salaries paid to employees.
  • The S Corporation is not subject to the so-called accumulated earnings tax that applies to regular Corporations that do not distribute their earnings and have no plan for their use by the Corporation.

Some of the disadvantages  (CONS):

  • S Corporations cannot have more than 100 shareholders.
  • No shareholder may be a nonresident alien.
  • Corporations, Partnerships, nonresident aliens , and most estates and trusts cannot be S Corporation shareholders. Electing small business trusts, however, can be shareholders, a distinct estate planning advantage.
  • S Corporations may not own subsidiaries, which can make expansion difficult, unless the subsidiary is a Qualified Subchapter S Subsidiary (a 100% owned S Corporation).
  • S Corporations can have only one class of stock.
  • A shareholder’s basis in the Corporation does not include any of the Corporation’s debt, even if the shareholder has personally guaranteed it.
  • S Corporations, generally, must operate on a calendar year.
  • S Corporation shareholder-employees with more than a 2-percent ownership interest are not entitled to most tax-favored fringe benefits that are available to employees or regular Corporations.

Some of these factors will be more important than others, depending upon the particular circumstances. If you would like to pursue this matter further and have us fully evaluate your situation, please do not hesitate to contact us at 212-979-6830 or stop by for a visit.. See you soon!

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