S-Corporations (S-Corp)

In this week’s edition of the Small Business Series we are discussing S-Corporations (S-Corp).  You may be asking yourself, “What in the world is an S-Corporation?”  In a nutshell, an S-Corporation is a corporation with 75 or fewer shareholders, that has elected and qualified for a special tax status with the IRS.  To set up an S-Corp you do all of the same steps that you would take to set up a C-Corp. However, whenever it comes tax time you indicate on your tax forms that you want to be taxed as an S-Corp.

The biggest advantage of forming an S-Corp is tax related.  Under an S-Corp structure the income passes through to the shareholders, therefore avoiding a perceived double taxation of a C-Corporation.  As an S-Corp the corporate entity is separate from stockholders.  Below is a list of some of the advantages and disadvantages with regards to S-Corps.

  • The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.
  • Fractional ownership shares are easily accommodated in the IPO.
  • With only a few exceptions, under the Subchapter S election for taxation as a partnership the S-Corp pays no income taxes on the corporation’s income, or loss, if passed through to the stockholders.
  • To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
  • Access to credit and the ability to secure needed resources may be improved.
  • Earnings are not subject to self-employment tax as long as stockholders-employees receive adequate compensations for labor and management of the business.
  • Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.
  • Restrictions of the sale of stock and/or buy-back agreements may prevent minority stockholders from being able to recover the value of their investment in the corporation.
  • Stock ownership can become divided among many persons making it difficult to obtain a majority vote.
  • Benefits paid to stockholder-employee may become costly and exceed the ability of the business to pay.
If you are interested in learning more about S-Corp’s or have any questions regarding any type of business structure or law, give Sansone Howell a call at (405) 455-1032 or (405) 550-4564. Or stop by our office at 1212 S. Air Depot Blvd., Suite 19A in Midwest City, Oklahoma.