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What are some advantages of an S corporation?

When setting up your business, it's important to know how the type of organization you choose will impact financial, legal and other issues in the future. One option for some businesses is an S corporation, and it comes with a number of benefits and some disadvantages. Working with a lawyer experienced in business law helps you understand what the pros and cons are and how they apply to your situation, so you can make an educated decision about business formation.

Tax savings are one of the top reasons many people consider S corporations. In an S corporation, all the income you receive may not be taxed as employment income; some of it could be taxed at a lower rate. This is because employment tax only applies to wages paid to employees of the S corporation, not income from shares. Income you receive as a shareholder or owner -- and not part of any paycheck -- is not considered wages, as it might be with an LLC.

The S corporation format also ensures that the business is independent of shareholders. This can be a benefit if one shareholder wants to leave the organization. The independence ensures exit plans that are beneficial for both the shareholder and the company.

One drawback of S corporations over LLCs or sole proprietorship is that corporations are run by stricter rules. This is especially true if shareholders are involved, because the business has a trust relationship with those shareholders and must ensure that actions support the interests of the customer, the business and the shareholder. It can be a difficult balance to strike, so ensure that the benefits of a corporation structure outweigh any disadvantages for your business.

Source: Small Business Association, "S Corporation," accessed March 17, 2017

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