Benefits of S Corporations | The Business Finance Store

S corporations are businesses in which taxes pass through to their shareholders. The owners pay taxes on their individual returns, but the business is not taxed as a corporation.

Big deal, right? If you plan to start (or already own) a sole proprietorship, you?ll already pay taxes at the personal level. Why go through with all the hassle of signing up for an S corporation?

By registering as an S corporation, you?ll receive numerous benefits that you wouldn?t as a sole proprietor. These include the following:

Limited Liability

As a sole proprietor, you and your business are attached at the hip from a legal standpoint. It?s debts are your debts and potential lawsuits could involve your personal assets. In other words, if things spiral out of control, you could lose not only your business, but your vehicle, house and/or other personal assets.

As an owner of a S corporation, you?ll benefit from limited liability. The business? debts will be separate from your personal debts, provided that you do not personally guarantee them. Also, the potential for you to be personally sued will decrease, as many of the company?s legal liabilities will be limited to company assets. In other words, a cash-hungry lawyer won?t be able to go after your personal assets if a defective product results in a lawsuit.

Example

Consider a situation in which you start a business as a sole proprietor. You invest $50,000 hard-earned dollars into it. If things go downhill, you could lose not only the $50,000, but your personal assets ? including your vehicle and home.

Now, suppose that you choose to structure your business as a S corporation. You could still lose your entire $50,000 investment, but you won?t watch as a repo-man hauls your car away. You also won?t spend the next few months at grandma?s house or on the streets. This sounds like a much safer option, doesn?t it?

Tax Savings

A traditional corporation pays taxes on profits. Also, the dividends that shareholders receive are taxed, which is effectively a double-tax. However, with a S corporation, taxes are levied once on the individual tax return of each owner, not twice.

Also, if a S corporation has a loss, each owner?s share of that loss is passed through to his or her individual tax return. This can even offset additional sources of income that an owner may have, which will reduce his or her taxes.

Additionally, the owners of S corporations are employees and are paid salaries. As compared to sole proprietorships and partnerships, this reduces profits, which reduces taxes owed.

Finally, note that, as the owners of S corporations are taxed at the individual level, their tax rates may be lower than traditional corporate tax rates. For example, an owner who earns $60,000 would pay $16,250 in federal income taxes under a traditional corporate structure and $15,000 under a S corporation structure.

Conclusion

A S corporation offers two key benefits. You?ll benefit from limited liability, which will help protect your assets. Also, you stand to benefit from tax savings, which most people enjoy. Of course, if you are eager to fund Congressional pay raises or bridges to nowhere, I?m sure they?d allow you to pay additional taxes voluntarily!

Give the S corporation structure strong consideration if you?d like to operate a business without losing your personal assets. Keep the tax savings in mind and, as with any other decision of this nature, seek assistance from an attorney, tax advisor and any other relevant professionals.

Source: https://www.businessfinancestore.com/2012/08/12/benefits-of-s-corporations/

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