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Comparing the advantages and disadvantages of an S corporation

On Behalf of | Feb 28, 2023 | Business & Commercial Law

Many business owners choose an S corporation as their filing structure for the corporation’s liability protection. In addition to legal protection, an S corporation provides several tax advantages.

Business owners use articles of incorporation filed with the Secretary of State to define their S corporation. Through this, the business is eligible to issue stock and to have officers, directors and shareholders. Because of filing protection, the assets of shareholders cannot come under suit to settle business debts.

Advantages of forming an S corporation

Filing a business as an S corporation protects the personal assets of its shareholders. Creditors and dissatisfied consumers cannot have the personal assets of shareholders seized in order to settle business debts. These corporations do not pay corporate income tax, as shareholders report income and losses through their personal tax returns. There are different accounting methods available to an S corp, as well as the perception of more credibility with this filing status.

Disadvantages of forming an S corporation

Those looking at an S corporation need to understand the expenses and fees for annual reporting, as well as the requirements regarding documentation and paperwork surrounding their stock ownership and profit distribution. There is also a limit on the number of shareholders allowed in this corporation and the class of stock available to offer.

Although there are many legal protections when filing as an S corporation, making a mistake during the filing process could leave the owner open to a lawsuit. By complying with all laws within the state regarding corporations, these businesses can maintain limited liability protection.