S Corporation Advantages and Disadvantages: The Complete Run-down
Especially for new business owners, making sense of the advantages and disadvantages of S corporation status can tough.
Sure, you know that many businesses operate as S corporations.
But you also know or sense that an S corporation burdens you and your accountant with extra work and expense.
Accordingly, in the short but thorough articles listed below, I explain and discuss the most significant "advantages and disadvantages of an S corporation" issues for small businesses:
Note: An S corporation is also popularly known as an S corp, Scorp, Sub S corporation, or Subchapter S corporation. All of these names, or "nicknames," indicate that a corporation had made an election with the Internal Revenue Service to be taxed according to Subchapter S of the Internal Revenue Code.
Disadvantages of an S Corporation
S Corporations present their owners and managers with several disadvantages, including the following:
- Accounting, tax preparation and payroll processing burden
- Banking and legal costs and redtape
- Restrictions on type and number of shareholders and classes of stock
- Extra costs to start and stop (as compared to a partnership or proprietorship)
Advantages of an S Corporation
S Corporations provide their shareholders and (maybe especially) shareholder-employees with three huge advantages. These advantages are:
- Better legal protection and accounting
- Avoidance of corporate income taxes in most situations
- Reduction in payroll and employment taxes paid by owners