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Although S corporations are a tax choice, there are limitations on what corporate entities can make election. The biggest hurdles are:
1. There can be no more than 75 shareholders;
2. Each shareholder must be a person, not a business entity; and
3. There can be only one class of stock.
While S corporations provide relief from tax filings of a C corporation, there are negative aspects to using them. Simply put, a C corporation can write off more expenses. S corporations may not be able to deduct certain types of insurance and costs of doing business. The list is fairly complicated, so you should speak with a tax professional prior to deciding which designation works for your business.
S Corporation vs. Limited Liability Company
S corporations have a definite tax advantage over limited liability companies [“LLC”]. Distributions from LLCs to shareholders are subject to self-employment tax [15.2 percent] in their entirety. Distributions from S corporations, however, can be broken down into two categories, salaries and dividends. The dividend distributions are not subject to self-employment tax. Avoiding self-employment tax can make a substantial difference in amount of money you take home.
I always laugh when someone emphatically says that every business should be formed as a particular entity. Such statements are simply wrong. The “best” business entity depends entirely on nature of your business. In many instances, S corporations are ideal.
Richard A. Chapo is a business lawyer with SanDiegoBusinessLawFirm.com - This article is for information purposes only. Nothing in this article is intended to address the reader’s specific situation nor does it create an attorney-client relationship.