What is an S Corp?

I discussed in my last post what an LLC is. Now let’s discuss another entity called an S corporation. So, what is an S Corp and how do you take advantage of it? and how is it different from an LLC? Well, let’s discuss the difference and see which setup is the best option for you.

This article is not going to sell you on starting an S Corp but it will give you the tools to decide what is best for you. If you are looking for a textbook definition of click here.

Advantages of an S Corp

When you look to start a legal entity you have to go in with a plan. Usually, that plan will consist of how you are going to handle your situation financially. That is the most important step. So let’s discuss what an S corp will do for you. When filing your status, you must file Form 2553. Which will allow the IRS to link your personal income tax return to the corporate return. Which will, in turn, income or loss will flow to your personal income tax return.

This can be either good or bad based on what you are trying to do. There are a few subtle differences between an S Corp and an LLC. I can’t get into the differences between the two in another article. But for this article what I will say is this an S corporation usually does not pay federal taxes at the corporate level. As a result, an S corporation can help the owner save money on corporate taxes. If you are wondering how this helps in any way consider this, since the money comes to them free of corporate tax, it allows you to avoid double taxation on any income or earnings.

That’s the benefit an S Corp can do for you. Again this might not be something that would fit your plan. But it is something to consider.

Disadvantages of an S Corp

Now that we have discussed the advantages let’s discuss some of the disadvantages of an S Corp. Not everything is all sunshine and roses, so let’s see what’s under the hood. One of the main disadvantages are, regarding the corporate tax piece discussed in advantages, is that most states don’t follow through with that rule. Some states will tax your S Corp as a corporation meaning you will, depending on the state, have to pay corporate taxes.

The next thing to consider is the number of fees you will incur as opposed to filing as an LLC. Some of these fees can include the fees for filing an annual report, and hiring a registered agent, which handles legal matters for the business. Another fee to consider is the fees for the Articles of Incorporation filed with the local Secretary of State office.

On top of all of the fees and taxes you will incur, you will also have way more regulations and guidelines that you will be forced to follow. Which I can spend an entire article writing about. Which is something I might do in future posts.

That being said, with all the laws, regulations, fees, and taxes that you will have to deal with you as the owner will find yourself with less control. Depending on what you are doing that can be either a good or bad thing. Totally up to you.

Takeaway

I hope this article has helped you understand what an S Corp is and what it can do for you. Understanding your options when starting a company is a good way of knowing what will benefit you and set you up for success. The hardest part in my mind is filing for your business. It can be a grueling task and you’re not really sure if you are making the right decision. Trust me I’ve been there. So, hopefully, with this article and follow-on articles, I can help you create your business with ease.