Question

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

Answer 1

Advantage of S Corporation

1) It protect the assets of the shareholders, shareholder is not personally responsible for the business debts and liabilities of the corporation.
2) Profits are distributed to the shareholders, who are taxed on profits at their personal level.
3) Income or loss pass through shareholders, now shareholders show them in their personal return.
4)  Interests in an S corporation can be freely transferred without triggering adverse tax consequences.
5) Entity must use accural accounting system, While S corporations usually don't have to use the accrual method unless they have inventory.

Disadvantage of S Corporations

1) Heavy incorportaion expense in comparison with proprietorship and partnership, Many states also impose ongoing fees, such as annual report and/or franchise tax fees. Although these fees usually are not expensive, and can be deducted as a cost of doing business.
2) Maximum of 100 shareholders can be there of which all must be U.S. residents or resident aliens. Shares must be held directly.
3) Capital gain on sale of assets will incur higher taxes than with other pass-through entities such as Limited Partnerships.
4) Owner/employees holding 2% or more of the company’s shares cannot received tax-free benefits.

If i want to start a business as a S corporation i would definately make a S Corporation, as it is more relaible than any other business structure.An S corporation shareholder’s personal assets, such as personal bank accounts, cannot be seized to satisfy business liabilities.