The advantages of S Corporation in greater details

devil-in-the-details

29 Jul The advantages of S Corporation in greater details

S Corporation is a tax pass-through entity while a C corporation is not.  Why is that important to Small Business Owners?

The profit of C Corporation is subject to corporate tax rate.  After the C Corporation pays its tax, the dividend that is distributed to the shareholders will be again subject to income tax at the shareholder level.  This is so-called the “Double Taxation”.  However, from a small business owner perspective, his business income can simply be included in the Schedule C of his 1040 return, thus there is no double taxation.  Nevertheless, the whole Schedule C profit is now subject to Self-Employment Tax (15.6%) before other tax calculations in the 1040 return.

S Corporation is so special in that its profit, after paying salary and wages to the owners, is now flowed into Schedule E of the owners’ 1040 return, and that is why it is called a pass-through entity.  The result is that there is no tax at corporate level and no Self-Employment tax.

Besides, the S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. These advantages are typically unavailable to sole proprietorship and general partnerships.

In a nutshell, S corporation advantages can be summarized below:-

  1. Protected assets.
  2. Pass-through taxation.
  3. Tax-favorable characterization of income. S corporation shareholders can be employees of the business and draw salaries as employees. They can also receive dividends from the corporation, as well as other distributions that are tax-free to the extent of their investment in the corporation.
  4. Heightened credibility. Operating as an S corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.

 

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