Question

Why is the election for S corp status attractive

Answer 1

Incorporating a running business- a partnership or a sole proprietorship-- as a S corportaion , by electing to file with the IRS --to be taxed under Subchapter-S of the IRS Code , for that status , has its more share of advantages than the contrary.

Points that are attractive to businesses , to get converted into an S Corportaion can be enumerated ,in the following points:

1. It can also issue stocks and have shareholders & directors ,just as a C corporation - & also remain immmune to the liabilities of the company.

2. Incomes & losses pass through to shareholders & are taxed only once in their hands, unlike a C Corportaion's income whuch is taxed twice --once at the corporate level & again ,in the hand sof the shareholders ,when distributed as dividends.

3. The shareholders are taxed at their individual rates ,on the above passed-through income/losses.

4.Transfer of ownership in an S corportaion is less cumbersome without any adjustment to basis of assets transferred, unlike in an LLC.

5. In case of passing of the company's losses,the shareholder can claim these losses , in his/her individual income-tax returns, against his/her other income.

6. Unlike in sole proprietor-ship,the shareholder is not personally liable or his assets appropriated, in the event of any dissolution/liquidation.

7. As the shareholders are both the owners & employees of the corporation, salaries in the guise of distribution attract very less of pay-roll taxes.