Question

What are the advantages and disadvantages of creating a S Corporation? If you were going into business, would you create one?

Explain the differences between a corporation and a s corporation

Answer 1

Meaning - S corporation is a corporation that elect to pass corporate losses, income, credits and deductions through to their shareholders for federal tax purposes. Shareholders of S corporations report the income and losses in their personal income tax returns and are assessed tax at their individual income tax rates.

Advantages:

- Limited Liability - In S Corporation owner is having limited liability, which means owners’ personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.

- Pass through taxation - Shareholders of S corporations report the income and losses of S corporation in their personal income tax returns and are assessed tax at their individual income tax rates. This also avoids double taxation.

- Ease of Conversion - An S corporation can be converted to a C corporation more easily than an LLC.

Disadvantages:

Difficult Qualification - For being an S corporation there are some strict conditions in terms of number and type of shareholders, which needs to be complied with.

Rigid Profit allocation norms - In S corporation profit must be distributed in ratio of shareholding, which is not the case with LLC. In LLC profit can be distributed in flexible ratios.

Corporate formalities - As S corporation is also a corporate structure, it must folloe norms and procedures of a corporate which increases teh compliance buden.

Opinion - If going into the business, S corporations can be the best choice if you are looking for a company structure that provides pass-through taxation and permits both salary and dividend payments. However, if one needs flexible and structure requiring less compliances, then S corporation is less preferable over LLC.

Difference between corporation and S corporation:

In S corporation, taxation is imposed at the level of individual shareholder, while in a corporation taxation is imposed at corporate level.