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What are the advantages of S-Corporation?

Carson, CA |

I just recently Corporated my Sole Proprietor business and have been seeing on forms about S-Corporation but I don't understand it. I am very new to this. What are the advantages of S-Corporation. My business is Construction - Commercial (Stone and Tiles). No employees. Family-run business. My workers receive 1099, not W2

Attorney Answers 5


  1. Best answer

    Actually, there are certain benefits to having a C-corporation as opposed to an S-corporation. Therefore, I would not agree that the comparison is between an S-Corporation and an LLC. For example, I set my office up as a C-corporation because I wanted to be able to pay for ALL of my co-pays, deductibles and all other out-of-pocket medical expenses not covered by insurance and be able to legally deduct those expenses as an expense of my corporation. That can be done with a C-corporation, but not with an S-corporation or an LLC. If I did not set up a C-corporation, such out of pocket expenses would have been paid personally by me and not be tax deductible. I suggest that you speak with a good accountant about the differences with the various corporate entities and which one makes the most sense for you.

    Since you already incorporated your business, you can leave it as a C-corporation or file for an S-election. You cannot convert it to an LLC. To do so, you would have to dissolve the corporation and set up a brand new LLC.

    The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change.


  2. If you mean, compared to a C corp, the better question is the comparison of an S corp and an LLC.

    S Corps are limited to 100 shareholders - LLCs have no limit on the number of members.

    All S Corp shareholders have to be US residents - an LLC's members don't.

    S Corps have to hold annual meetings of shareholders and directors and have minutes or consents for each of those meetings - LLCs don't have those maintenance obligations.

    S Corps have directors and have to elect officers - an LLC can be managed by its members.

    Get the guides below, or ones like them, and/or see a business lawyer to avoid making other decisions that aren't in your best interest.

    Disclaimer: Please note that this answer does not constitute legal advice, and should not be relied on, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. This answer does not create an attorney-client relationship.


  3. Since answering your question before, Pamela (the attorney who also answered your question) has pointed out that she agrees with my response regarding the ability to have certain tax deductions with a C-Corporation that are not available with the other corporate entities. However, she also pointed out that there are forms available now that allow for the conversion of an LLC to a corporation and vice versa.

    The response given is not intended to create, nor does it create an ongoing duty to respond to questions. The response does not form an attorney-client relationship, nor is it intended to be anything other than the educated opinion of the author. It should not be relied upon as legal advice. The response given is based upon the limited facts provided by the person asking the question. To the extent additional or different facts exist, the response might possibly change.


  4. The major advantage of an S Corporation is that it is a "pass through" entity, that is, it pays no tax itself, but passes through all tax aspects to its owners. This means that you pay tax personally on the amount earned, and this can be an advantage to a small business with only a few owners. Please note that there are time limits as to when "S" status must be applied for after the corporation is formed.


  5. I know this question is a couple of weeks old, but I wanted to answer and fill in a couple of holes. Each of the answers you got was correct in what they said, but didn't actually answer your question. So, here goes...

    When you form a corporation, you must decide whether the corporation will be a separate taxpayer (i.e. a C-Corp) or whether the corporation will have its income pass through directly to your income tax return (i.e. an S-Corp). The main advantage of a C-Corp is that it lets you accumulate retained earnings - something that is useful for businesses that want to launch a major expansion at some point in the future. The main disadvantage is that corporate profits would be taxed at a flat 35% rate. This can result in double taxation, although if you work with a good accountant, double taxation is rare.

    The main advantage of an S-Corp is that profits (and losses) flow through to the owner, which makes tax reporting simpler, and you avoid the risk of double taxation. It also makes it possible to reduce your taxable income if you show a loss, because you can pass the business loss down to your personal taxes - something you can't do with a C-Corp.

    The comparison to LLCs, to me, is just weird. LLCs are an alternative to a corporation, yes. But, you've already made that choice. And, from a tax standpoint, there is no difference. An LLC can "check the box" and elect to be taxed as an S-Corp, a C-Corp, or a partnership. So, yes, there are advantages to using an LLC, but those advantages have nothing to do with S-Corp or C-Corp status.

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