There are several reasons why you might consider forming an S corporation (S corp) for your business. S corps are a type of corporation that elect to be taxed as a small business corporation, which can offer some significant tax benefits to the owners (called "shareholders"). Here are a few of the main reasons why you might want to form an S corp:
Pass-through taxation: Like a limited liability company (LLC), an S corp is a pass-through entity, meaning that the profits and losses of the business are passed through to the individual shareholders and taxed at their personal income tax rates. This can be a significant advantage for business owners who want to avoid double taxation, which is when a business pays corporate income tax on its profits and then the shareholders pay personal income tax on the same profits when they are distributed as dividends.
Self-employment tax savings: One of the main benefits of an S corp is that it can help business owners save on self-employment taxes. Because the profits of an S corp are taxed at the individual level, the owners can take a salary from the business and pay themselves a reasonable wage, which is subject to self-employment tax. Any profits above and beyond the salary are taxed as dividends, which are not subject to self-employment tax. This can be a significant tax savings for business owners who would otherwise be subject to self-employment tax on all of their business income.
Limited liability protection: Like a corporation, an S corp offers limited liability protection to its owners, meaning that the personal assets of the shareholders are not at risk if the business is sued or incurs debt. This can provide peace of mind for business owners who want to protect their personal assets from business-related liabilities.
Potential for future growth: If you are starting a small business but have plans for future growth, an S corp can provide a strong foundation. S corps have a more formal management structure than LLCs, with a board of directors and annual shareholder meetings, which can be beneficial as your business grows and becomes more complex.
Potential for attracting investors: If you are looking to attract investors to your business, an S corp may be a more attractive option. Investors may prefer the formal management structure and limited liability protection offered by an S corp, as well as the potential for tax savings through pass-through taxation.
Of course, there are also some potential drawbacks to forming an S corp, such as the added paperwork and compliance requirements. It's important to carefully weigh the pros and cons and consult with a tax professional before deciding whether an S corp is the right choice for your business. Reach out to Davis Accounting & Tax to see if an S-Corp will save your business money!