Question

Explain to a business owner who doesn't understand tax, in 3-5 sentences. Give examples and expand where necessary.

Why would a business choose to elect the S corporation status?

Answer 1

A business would choose to elect the S corporation Status because of the benefits it provides The most important benmefit is obviously the tax benefit it offers. It choosest o be taxed under Subchapter S of the Internal Revenue Code, making it a “pass-through” entity for tax purposes. Some of the other benefits are:

1) Asset protection. It provides the owner of the business with limited liabiity which means that owner's personal assets are not affected by the claims against the corporation. For example: If an S corporation is getting insolvent, the owner's property can not be used to pay off the creditors.

2) Salary and Dividend payments: The business owner can opt to receive both a salary and dividend payments from the corporation. This can result in a lower tax bill overall. For example: the dividends are not subject to self-emplyed tax. also the salary can be reduced from overall income of the business which will result in less taxes.

3) Easy conversion. If later the owner wants to convert to a C corporation it is not a troublesome process and can be done with a lot of ease.