S Corporation: Connecting the Dots

Some of the benefits of running your business as S Corporation include:

Protected Assets

Shareholders’ personal assets are shielded from business debts and liabilities, unlike in sole proprietorships and general partnerships.

Pass-Through Taxation

Business income or loss is reported on shareholders’ personal tax returns, avoiding federal corporate taxes and allowing business losses to offset other income.

Tax-Favorable Income Characterization

Shareholders can receive salaries and dividends, reducing self-employment tax liability and generating deductions for the corporation.

Straightforward Ownership Transfer

Interests can be transferred without adverse tax consequences or complex accounting adjustments.

Cash Method of Accounting

S corporations usually don’t have to use the accrual method unless they have inventory, unlike C corporations.

Heightened Credibility

Operating as an S corporation can enhance credibility with customers, employees, vendors, and partners compared to sole proprietorships or partnerships.

Potential Disadvantages of an S Corporation

Considering forming an S corporation? Here are some potential disadvantages to keep in mind, and how our services can help you navigate them:

Formation and Ongoing Expenses

Challenge: Incorporating your business, designating a registered agent, and paying state fees can be time-consuming and costly.
Solution: We handle incorporation, registered agent services, and state filings efficiently.

Compliance Requirements

Challenge: Compliance includes obtaining an EIN, necessary licenses, permits, and filing a Beneficial Ownership Information (BOI) report with FinCEN starting January 1, 2024.
Solution: Our team ensures all compliance requirements are met, including BOI reporting.

Organizational Meeting

Challenge: Holding an initial meeting of directors, adopting bylaws, appointing officers, and recording stock transactions are essential and complex steps.
Solution: We facilitate the organizational meeting, help draft bylaws, and manage stock records.

Tax Qualification Obligations

Challenge: Mistakes in election, consent, notification, and filing can terminate S corporation status.
Solution: We provide expert guidance to ensure compliance with all tax qualification requirements.

Calendar Year Requirement

Challenge: S corporations must use a calendar year unless a business purpose for a fiscal year is established.
Solution: We assist in establishing the best fiscal year for your business needs.

Stock Ownership Restrictions

Challenge: Limited to one class of stock, 100 shareholders, no foreign ownership, and restrictions on certain trusts and entities.
Solution: Our advisors help you structure stock ownership to comply with S corporation rules.

Closer IRS Scrutiny

Challenge: IRS scrutinizes dividends and salaries, affecting tax deductions and liabilities.
Solution: We provide tax planning services to ensure proper characterization of distributions.

Less Flexibility in Income and Loss Allocation

Challenge: Income and loss allocation based on stock ownership, not flexible like in partnerships or LLCs.
Solution: Our tax experts help you optimize income and loss allocation within the S corporation framework.

Taxable Fringe Benefits

Challenge: Fringe benefits for employee-shareholders owning more than 2% are taxable as compensation.
Solution: We offer strategies to manage and minimize the impact of taxable fringe benefits.

For specific questions about which business structure and tax classification are best for your situation, consult our experienced team. Let us simplify the complexities of forming and maintaining an S corporation for you.