What is the importance of having an S Corporation?

Below, you will find a list of reasons why it is advisable to form an S Corporation.

• S corporations do not pay taxes at the corporate level.
• It is permissible for stockholders or officers to withdraw payroll, unlike an LLC where the company's owners are not permitted.
• If an S Corporation fails to comply with legal requirements or engages in misconduct, just like other business entities, it can lose its corporate veil.
• It is prohibited for non-United States residents to be one of the 100 shareholders of an S Corporation. Husband and wife are regarded as one stockholder.
• Stockholders are accountable for paying taxes on their liabilities based on their ownership. There is no general partner who will take on unpaid debts for others.

How is an S corporation different from a C corporation and a LLC?

S Corporation

• The corporation itself is not taxed as S corporations benefit from 'pass-through' taxation. Instead of paying income to shareholders, they report it on their personal tax returns.
• Only 100 shareholders are allowed to hold ownership, and they must either be citizens or residents of the United States.
• To establish corporate structure, it is necessary to have a formal structure that includes a board of directors, officers, and adherence to corporate formalities.
• Ownership percentages determine how profits and losses are distributed.

C Corporation

• Taxation results in double taxation—once at the corporate level and then at the shareholder level when dividends are distributed.
• There is no restriction on the number of shareholders, and they are able to be either individuals or entities, both domestic and foreign.
• Like S corporations, corporate structures require a formal structure that includes a board of directors, officers, and adheres to corporate formalities.
• Profit distribution can be made more flexible by tailoring it to different stock classes.

LLC (Limited Liability Company)

• Pass-through taxation is typically preferred, much like an S Corporation, but the option exists to be taxed like a corporation.
• Members may be either individuals or entities, both domestic and foreign, and there is no limit to the number of owners.
• Corporate structure is able to adapt more easily than S and C corporations. A board of directors or strict adherence to corporate formalities are not needed.
• The members can agree on a way to distribute profits, not necessarily based on ownership percentages.