The Pros and Cons of Filing Taxes as an S Corporation

If you own a modest company, you might want to investigate the possibility of submitting your taxes as a S corporation. Before settling on one course of action, it is critical to examine all of the facets of the situation, including both the positives and the negatives.

Small business proprietors who choose to file their taxes as a S corporation may be eligible for a number of advantages, including financial savings, protection from personal responsibility, continuity of business operations, and an easier time collecting capital.

Nevertheless, it is essential to give thorough consideration to the potential disadvantages, which may include prohibitions on possession, increased administrative complication, and the possibility of double taxation. In the following paragraphs, we will discuss both the benefits and the drawbacks of submitting tax returns as a S corporation. Well, let’s proceed before you look for the best company for taxes.

What is an S Corporation?

First things first: before we get into the benefits and drawbacks of submitting taxes as a S corporation, let's take a moment to discuss what exactly a S corporation is.

A conventional C corporation is subject to a different taxation scheme than a different form of corporation known as a S corporation. When a company is established as a S corporation, for the purposes of federal income taxation, the company is regarded as a pass-through organization.

This means that the earnings and deficits of the business are reported on the personal tax returns of the proprietors, rather than the business itself being subject to taxation at the corporate level.

The Pros of Filing Taxes as an S Corporation

Tax Benefits

The possibility of receiving favorable tax treatment is among the most significant benefits of submitting tax returns as a S corporation. Because the earnings and losses of the business are transmitted through to the proprietors' personal tax returns, as was discussed previously, S corporations typically escape paying federal income tax at the corporate level.

The owners of a S corporation are only required to pay self-employment taxes on their salaries. This has the potential to result in substantial savings, particularly for companies that pay their employees greater wages.

Limited Liability Protection

Filing taxes as a S corporation comes with additional benefits, one of which is the provision of restricted liability protection for the proprietors. To put it another way, in the event that a litigation or some other form of legal action is taken against the company, the proprietors' personal assets will be shielded from the judgment.

However, it is essential to keep in mind that this protection against restricted responsibility does not extend to cases of personal misconduct, such as theft or embezzlement. This fact is very important. In situations like these, the proprietors may still be held individually responsible for any damages that occur.

Business Continuity

An S corporation can continue to function even if the owners are changed, which is not the case with a single proprietorship, which fails as soon as the owner passes away. Those who run a company and want to make sure it stays in business for a long time may find that this gives them some piece of mind.

Transferring possession of a corporation from one set of individuals to another does not interfere with a company's ability to carry on its daily activities or cause it to lose the financial advantages that come with being classified as a S corporation.

Ease of Capital Raising

S corporations provide investors with the opportunity to participate in a corporation while still experiencing the favorable tax treatment afforded to partnerships. This makes S corporations a potentially alluring choice for investors.

Because of this increased degree of adaptability, it may be simpler for S corporations to win over investors and gather the funds required for growth and expansion of their businesses.

The Cons of Filing Taxes as an S Corporation

Let's take a look at some of their disadvantages of submitting tax returns as a S corporation:

Limitations on Property Ownership

The ownership requirements that come with submitting taxes as a S corporation are one of the potential drawbacks of doing so. S organizations can only have up to one hundred stockholders, and those shareholders must all be citizens or permanent inhabitants of the United States. Because of this, the company may find it difficult to attract new investors or broaden its shareholding base.

Complexity of Administration

Administrative Difficulty S corporations are susceptible to additional administrative requirements, such as yearly gatherings and stockholder ballots. These additional requirements can make administration more difficult. Because of this, it is possible for them to be more difficult to handle than other corporate arrangements.

Limited Flexibility

S corporations are subject to a number of restrictions, including constraints on the kinds of shares that can be distributed and the classifications of stockholders that can be established.

As a result, the amount of flexibility available to S corporations is limited. Because of this, the company may have less leeway to adapt to changing conditions in terms of its shareholding and managerial organization.

Conclusion

Before settling on a course of action, it is critical to give thorough consideration to both the benefits and drawbacks of filing taxes as a S corporation, even though doing so may be a beneficial choice for certain kinds of companies.

S corporations come with a number of drawbacks, including ownership limitations, increased administrative complexity, and the possibility of being taxed more than once, despite the fact that they do provide limited liability protection and tax advantages.

If you are thinking about submitting your taxes as a S corporation, it is imperative that you seek the advice of a tax expert and thoughtfully consider all of your available choices before settling on the option that will be most beneficial to your company.