Monday, June 28, 2010

Primary Advantages of S Corporations

The primary advantages S corporations have over regular corporations are tax-related. Owners of S corporations are not subjected to the double taxation all C corporations face. Profits can be passed through the owners' individual income tax, while the corporation itself is not taxed.

The main advantages corporations have over sole propriety businesses are their limited personal liability. S corporations can have this same protection but not subject themselves to corporate taxation.

Being able to easily raise funds is also another advantage corporations have over sole proprietorships. However, since a corporation is considered its own entity, the profits of a corporation are taxed, and the shareholders are taxed again for the same income. In an S corporation, shareholders directly file the income as individual income, while the corporation itself is not taxed.

Another advantage S corporations have is they can declare interest paid for S corporation stocks as an investment interest expense. S corporations are subject to similar rules as those with a sole proprietorship or partnership type of business. Since money obtained from S corporations are not considered wages, they are not subject to self-employment tax.

When starting a business, it may be undesirable to offer fringe benefits to employees, because it may not be affordable. S corporations are given favorable treatment over non-corporations due to their ability to deduct expenses such as this from their taxes. While sole proprietorships can only deduct 30% of benefits, such as medical insurance, S corporations are allowed to deduct 100% of the cost.

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