An S corporation is a unique type of business structure that can work well for small and mid-sized organizations. It bears similarities to a regular C corporation but with different rules and tax treatment.
Understandably, many people file their businesses as a limited liability company. However, there are various advantages to starting a business as an S corporation or changing an LLC’s structure to this type of entity.
Self-employment tax savings
An S corporation can allow owners to save on self-employment taxes. The reason is that the arrangement divides ownership with shares instead of a partnership agreement.
Shareholders can receive income in two ways: salary and distributions. Shareholders who work in the business must pay themselves a reasonable salary, subject to employment taxes. However, they can take the remaining profits as distributions, which are not subject to self-employment taxes.
This strategy can lead to significant tax savings for S corporation shareholders while still complying with regulations. Even if a business starts an LLC, the owner or owners can register with the state and federal government for treatment as an S corporation at a later date.
Tax savings on corporate benefits to employees
An S corporation enables a company to deduct corporate benefits as business expenses for items like health insurance, retirement plans and other perks. In sole proprietorships and partnerships, such expenditures may not receive the same treatment. By leveraging the tax advantages of an S corporation structure, businesses can attract and retain talented employees by offering competitive benefits packages without incurring additional tax burdens.
Easier ownership transfers and estate planning
An S corporation can offer estate planning benefits in the way owners transfer shares to family members or heirs. For example, shareholders can gradually transfer ownership without triggering immediate tax consequences. This gradual transfer can help minimize estate taxes upon the owner’s passing.
Additionally, S corporations can simplify the continuity of business operations after the owner’s death. Ownership shares can easily pass to heirs without disrupting the company’s structure or dealings.
S corporations offer unique benefits that are worth examining. Business owners should periodically review their company structure to determine when it might make sense to file as this entity.
