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Tax Management: Why Choose an S Corp?

Choosing the right entity for a business could give significant tax savings.

Let’s explore S Corporations and see how they can be the best choice for some businesses.   

One of the main benefits of an S Corp is what’s called pass-through taxation, which means business income and losses are not taxed at the company level, but are instead reported on an individual’s tax returns.

This can save money on taxes because a person is not being “double taxed” at both the corporate and individual level. Rather, they only get taxed at the personal level on the profits they take.  

This tax loophole is the biggest benefit of an S Corporation and why many businesses change their entity type. 

In addition, S Corps offer protection for business owners from being personally liable for the business’s debts or legal disputes.

A drawback of S Corporations is that they cannot have more than 100 shareholders. This means an S Corp cannot go public because of this shareholder limit.   

Another drawback of an S Corp is that it cannot retain earnings inside the business. Since all earnings in an S Corp are passed through to the owner as either wages or distributions, this results in being unable to retain earnings inside the business to delay paying taxes.

A third drawback is that S Corp owners are required to hold annual shareholders’ and directors’ meetings with minutes taken. Many business owners don’t want to be burdened with these requirements. 

So, with all that said, an S Corp has plenty of benefits but also some drawbacks to keep in mind. 

Since choosing an entity can be so complex, we created Corvee Tax Planning software, which supports strategic entity planning that can help optimize your tax situation.  

Automatic calculations for multiple strategies, entities and years make  comprehensive tax planning possible with a few clicks of a button.

Visit Corvee.com for much more on choosing an entity and legally reducing your taxes.