Do you have a corporation or are thinking of creating one? If so, you probably are contemplating of thinking if you should create or switch to an S-Corporation. The following article discusses the pros and cons of forming an S-Corporation.
Know what the cons are of having an S-Corporation:
1) You can only have one class of stock. Only have one class stock will limit the flexibility, the control and may have limitations on the value of the company.
2) You will still need to file a separate tax return every year and issue K-1s to every shareholder.
3) A non-American resident may not be a shareholder of an S-Corporation.
4) The corporation must always stay domestic and be limited to operating in the United States.
5) If even one shareholder does not agree in being an S-Corporation, the corporation may not elect for S-Corporation status.
Know what the pros are of having an S-Corporation:
1) The biggest attraction to an S-Corporation is that the profits and losses of the corporation pass through to the shareholder's personal income tax. This avoids the dreaded double taxation.
2) If you sale your corporation you will have personal capital gains which will be taxed lower on your personal income tax return.
3) You will be able to write-off start-up expenses on your personal return which would otherwise been stuck with the corporation.
4) You will have the liability protection of a corporation. Although you still may be liable for your personal actions, the corporation's liability will be stuck with the corporation and not with the individual owner.
Know what an S-Corporation is:
An S-Corporation is basically just a regular corporation that has elected for a different tax treatment. Regular corporations get taxed separate from their shareholders. Basically, a corporation makes income than get taxed on that profit. After that profit has been taxed, the net profit after taxes gets distributed to its shareholders. Than the shareholders gets taxed again on that same profit on their individual tax returns. This structure results in the same profit getting taxed twice. This is otherwise known as double taxation.
If you elect for S-Corporation status, you are asking that your corporation does not get treated as a separate entity for tax purposes. Instead, you are electing that your corporation's income passes through to the shareholders and only get taxed once on their individual tax return.
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