What You Need to Know About S Corporations
If you are about to start your own business, then you need to take time and look into S corporations. Sole proprietors and general partners are encouraged to incorporate their businesses into S corporations and reap the benefits of doing so. There is a common misconception that incorporating businesses into S corporations is both expensive and time-consuming. We can describe an S corporation as an enterprise whose income taxes are paid by shareholders and not the company. All items of S corporations' returns are passed to shareholders, meaning that they get to be reported in their individual returns. The shareholders of S corporations do not have to worry about their personal assets being seized in times of bankruptcy because S corporations are held independently.
An S corporation is similar to a sole proprietorship or a partnership in the case of passing incomes and losses to shareholders. This is vital because it ensures that the owners of a business are not taxed twice. Losses and incomes passed on to the shareholders are subject to an individual tax rate. Shareholders only pay tax once, that is at the individual level. There are many benefits to S corporations, as will be seen in this article.
The first benefit of S corporations lies in its mode of taxation. There is pass-through taxation in S corporations. S corporations are therefore exempted from paying taxes at the corporate level. Pass-through taxation means that the shareholders in an S corporation are required to report their share of the corporation's incomes or losses in their individual returns. If a corporation incurs losses, its shareholders can use this to their advantage since losses offset other incomes, thereby reducing total tax liability. This is a major benefit for shareholders of start-ups.
The second advantage of S corporations is that they allow for a straightforward transfer of business ownership. S corporations are better than partnerships and limited liability companies when it comes to the transfer of interests because they can do so without triggering business termination or drastic tax consequences. S corporations are not required to make complicated adjustments to property every time there is a transfer of interest.
The other benefit lies in the protection of shareholders' assets. No shareholder is held liable for the corporation's debts unless they offer an express personal guarantee. What this means is that you are protected from the corporation's creditors. This is unlike general partnerships and sole proprietorships, where the business and its owners are considered one.