S Corporation Disadvantage #1: Extra Accounting Requirments

S Corporation Disadvantage #1: Extra Tax Accounting

S Corporations present their owners and managers with several disadvantages, but perhaps the biggest disadvantage for a previously un-incorporated business concerns the extra accounting required.

S Corporation Accounting

For the sole proprietorship that's considering an S corporation, the S corporation choice may require more or better bookkeeping and accounting.

This "extra accounting" disadvantage means that either you'll need to learn more accounting or you'll need to pay a bookkeeper or accountant to do the accounting. You'll also, as a practical matter, need to buy a copy of an accounting software program like QuickBooks.

S Corporation Tax Returns

As compared to a sole proprietor, S corporation tax returns also cost more to prepare. Partly, the extra cost stems from the increased complexity of a corporate return. And partly, the extra cost stems from the fact that a corporate return is typically many more pages than a simple sole proprietorship tax return.

An S corporation, for example, would often be required to prepare and submit balance sheets as part of its tax return.

Even if you've been able to prepare your own sole proprietorship tax returns by hand or by using something like TurboTax, you may not want to prepare S corporation tax returns yourself. In my opinion, you shouldn't prepare a corporate tax return yourself. The corporate return is just too complicated for a non-accountant.

S Corporation Shareholder Payroll Processing

For one person businesses, an S corporation may force the firm to "do payroll." In other words, even if the proprietor is the only person working in the business, the business will need to make the owner an employee and begin paying the owner-employer a reasonable wage. Treating an owner as an owner-employee means the business needs to file additional quarterly and annual payroll tax returns.

If a business already employs workers, the extra headache of adding one more employee, the owner, usually isn't significant. But adding that first employee-even if the employee is the owner-creates a bunch of work.

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