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When does it make sense to form an S corporation?

Because of the ease of filing and management flexibility, many business owners set up their organizations as a limited liability company. This structure is often ideal when building a business.

As a company grows and seeks to expand, ownership may start to consider the benefits of incorporating. Therefore, it makes sense to understand how an S corporation works and can benefit a company.

The similarities between an S corp and an LLC

An S corp offers liability protection to owners, the same as an LLC does. Therefore, any legal issues or liabilities the business has should not affect the personal property of the company’s ownership as long as the shareholders follow the guidelines for keeping those interests separate.

S corps also operate as pass-through entities. That means the company itself does not pay federal income taxes. Instead, the business’s profits and losses go to the owners, who report the income on tax returns.

Naturally, S corps will have to comply with state guidelines, just as LLCs do. For example, domestic for-profit corporations have a $15 fee to file their annual reports and a $40 fee to file articles of incorporation.

The benefits of operating as an S corp

At the same time, an S corp can offer unique advantages. Instead of having member-owners like an LLC, the ownership of an S corp is its shareholders. This can allow the shareholders to save on self-employment taxes. While they must pay themselves a reasonable salary, the remaining profits can come to shareholders as dividends, which are not subject to self-employment tax.

S corps can also give a company an advantage in attracting quality employees. These businesses can more easily offer tax-deductible fringe benefits, such as health and life insurance, education assistance and retirement plans.

Also, a corporate structure can enhance the perception and professionalism of a brand. S corps often have a more structured corporate governance and framework in comparison with LLCs.

Furthermore, the ability to issue stock could be a way of attracting investors for capital expansion. An S corp might also open the door to more favorable options for estate planning, especially regarding the transfer of stocks or assets to heirs.

While an S corp can require more work to set up and manage, it can be worth it for thriving businesses. Entrepreneurs do not have to settle for using an LLC when this structure might be the better option.