Up to now, I’ve covered sole proprietorships, general partnerships and limited liability companies (LLC).  Now let’s talk about S-Corporations.  The majority of our clients are S-Corporations.  I’d imagine that CPAs favor S-Corporations like lawyers favor LLCs.  It’s not the perfect entity, but we see advantages over the other entities for most privately held businesses.

In general, S-Corporations and C-Corporations have many of the same advantages and disadvantages. There are some very distinct differences you’ll need to consider.  We’ll focus on S-Corporations for today’s post and C-Corporations in part 5.

ADVANTAGES:

• Continuity of life – by operation of law the entity has an infinite life.  It is not dependent on its shareholders.
• Transferability – generally shareholders are free to sell or transfer their ownership interests at will as long as there is a willing buyer or transferee.
• No double taxation – an important difference from the C-Corporation; profits and losses flow through to the shareholders – and NO self employment tax! (Reader beware – Congress is trying to change the self employment tax part…)
• No liability – generally, shareholders do not have personal liability for the business’s obligations. Owners are only at risk for their investment.
• Bankruptcy – entity can file for bankruptcy.
• Distributions – shareholders can take distributions tax free, though they pay tax on their proportionate share of profits.

DISADVANTAGES:

• Complexity – forming a corporation is nearly as complex and expensive as an LLC or LLP.
• S-Corporation limitations –
  • No more than 100 shareholders allowed
  • Shareholders must be individuals, estates or certain trusts
  • Must be a domestic corporation
  • Generally only one class of stock allowed
  • All shareholders must be US residents or citizens
  • Formalities – once formed, there are certain formalities that should be followed.
  • Asset distributions – assets taken by shareholders must be removed at fair market value which can create a taxable transaction.
  • Shareholders have no management rights – Shareholders elect the Board of Directors who elect the officers.  The officers manage the corporation.
  • Dissolution – unwinding generally involves a taxable transaction

See a professional when making these decisions. Every situation is unique and must be considered separately.

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