Many successful small business owners usually reach a point where they wish to incorporate a Limited Liability Company for legal or business purposes. While there are definite advantages of forming any business, S-Corporations have far more advantages than other corporations. Keep reading for the four main benefits of being an S-Corp.
An S-Corp protects owners against liabilities, irrespective of its tax status. This means that all your business assets are protected against any claims from your creditors whether they are litigation or contract claims.
However, if a company does not incorporate, the owners’ personal assets may be used to pay for the liabilities and debts of the business. This is because the business is not a separate legal entity.
Pass-through taxation offers tax advantages to small businesses. Since S-Corps are not taxed at corporate levels, any business profits and losses pass through to the shareholders’ income tax. This means that any losses encountered by the business can help to offset other income on the owners’ tax returns to minimize the income tax paid. This allows you to avoid ”double taxation,” as compared with C-Corporations.
S-Corp shareholders become employees of the company and receive a salary. This helps to reduce the overall tax bill. However, the division of the salary should be reasonable, as defined by the IRS.
A reasonable characterization of salary distribution can assist the owner in minimizing self-employment tax liability while still managing the expense and salary deductions for the corporation.
LLC’s that wish to change to an S-Corp can do so relatively easily -Foster Financial can assist with this conversion.