Advantages Of A S Incorporation
The “S” in S-Corporation identifies the tax designation of your corporation. The primary advantages of a S Corporation when compared to other types of corporation are tax advantages.
Electing to designate your corporation as an S-corporation allows the shareholders to claim profits and losses directly on their taxes and avoid the double taxation of a C corporation.
In simple terms, an S Corporation is allowed to “pass through” its taxes to the company’s shareholders in direct proportion to their shareholdings. Profits can be passed through the shareholder’s’ individual income tax return, and the corporation in turn pays no tax on those profits.
While electing to be an S corporation does have legal implications, such as having no more than seventy five shareholders, the primary S Corporation benefits are pass through tax advantages.
For your business to become an S corporation, you must file an election with the IRS. Usually no documents need to be filed with any other state entity, such as the secretary of state, it's just the IRS you deal with in making the election.
S Corporations retain the same limited liability protection advantages as other types of corporation, which is the primary advantage over being a sole trader, who trade without any limited personal liability protection.
S corporations are basically governed by similar rules and legislation as sole traders or partnerships, in that any monies received from an S corporation are not classed as wages and therefore not assessed as self-employment tax.
S-Corporations receive favorable treatment over non-corporations as they are allowed to deduct certain expenses from their taxes whereas sole proprietors are limited in what they can claim, usually to 30% of the expense.
If you're interested in forming an S Corporation after reading about the advantages of doing so, you can read about the process of S-Corporation election here.