If you are about to start your own business, then you need to take time and look into S corporations. Sole proprietors and general partners are encouraged to incorporate their businesses into S corporations and reap the benefits of doing so. You will find people telling you that incorporating your business into an S corporation is not a worthwhile venture, and is expensive and time-consuming, but do not listen to them because this could not be farther from the truth. An S corporation is a type of corporation that elects to have its federal income taxes paid by its shareholders rather than the company. Shareholders of S corporations report all the items of the S corporation’s returns in their individual tax returns. S corporations are similar to C corporations in that shareholders are not held liable for business liabilities.
Losses and incomes in S corporations are passed through to shareholders, just like is the case with sole proprietorships and partnerships. This eliminates the concept of double taxation. An S corporation’s shareholder is required to pay tax depending on the losses or incomes passed to the by the S corporation. Shareholders only pay tax once, that is at the individual level. This article will be looking at some of the common merits of S corporations.
The first benefit of S corporations lies in its mode of taxation. There is pass-through taxation in S corporations. What this means is that an S corporation does not pay taxes at the corporate level. Pass-through taxation means that the shareholders in an S corporation are required to report their share of the corporation’s incomes or losses in their individual returns. If a corporation incurs losses, its shareholders can use this to their advantage since losses offset other incomes, thereby reducing total tax liability. You stand to benefit a lot from pass-through taxation if you have just begun your business.
The second advantage of S corporations is that they allow for a straightforward transfer of business ownership. A lot of people today are incorporating their businesses into S corporations because there is no triggering of termination or large tax consequences when there is transfer of interests, like is the case with limited liability companies and partnerships. S corporations save business owners from having to go through the trouble of making property adjustments when interests are transferred. Explore more about s corporations on this page.
Finally, your personal assets are protected when you incorporate your business into an S corporation. You are safe from the liability of the corporation’s debts. What this means is that you are protected from the corporation’s creditors. This is unlike general partnerships and sole proprietorships, where the business and its owners are considered one. Read more about corporations at https://www.encyclopedia.com/social-sciences-and-law/economics-business-and-labor/businesses-and-occupations/corporation.