He is the owner of a retail chain that has started to grow rapidly. However, with the Subchapter S Corporation election, the corporation’s profits and losses flow through to its shareholders’ personal tax returns immediately and are not taxed at the corporate rate. An S corporation limits the type of shareholders allowed, the number of shareholders, and the type of ownership interest shareholders may have. They are constrained by rigid criteria of allocating profits and loss. Frequently, this question arises whenever a client is just starting a business, or has been operating as a sole proprietor and may be wondering about the tax advantages of incorporating as an S Corporation.. Also, many clients assume it will be too costly or time-consuming to incorporate—but neither is the case. (A C corporation is taxed under Subchapter C of the Internal Revenue Code.) The advantages of the corporation structure are as follows: Limited liability.The shareholders of a corporation are only liable up to the amount of their investments.

However, public corporations have distinct advantages that shouldn't be overlooked. Another important disadvantage of an S corporation concerns an S corporation's ownership. For instance, some states choose to follow the federal tax requirements for S corps, while others ignore the S corporation status and tax the company as a C corporation. Disadvantages of S corporation types include legal barriers that prevent them from having more than 100 owners or having shareholders that are non-U.S. persons. S corporations are also handicapped by requirements to hold annual meetings and appoint a board of directors. Limited number of shareholders; An S corp cannot have more than 100 shareholders, meaning it can’t go public and limiting its ability to raise capital from new investors. An S Corporation Vs. a Partnership: Pros & Cons. An S corporation offers similar liability protections, ownership, and management advantages as a C corporation. Newsletter. As an owner, you can avoid having your business taxed twice. An S Corporation is often considered alongside a limited liability company when someone is looking for something more formal than a sole proprietorship. • Define the advantages of being taxed as an S-Corp • Recognize the difference of taxation as a S-Corp compared to a C-Corp • Understand how profit distributions and payroll are taxed in a S-Corp • Determine if this is a good tax entity choice for your client • Learn how to make the S-Corp election 2 The number of U.S. public corporations is shrinking from one year to the next.