A Subchapter S (Sub-S) corporation is a type of business that meets specific requirements laid out by the Internal Revenue Service (IRS). In essence, it allows small companies with a limited number of shareholders (under 100) to enjoy the benefits of incorporating while still keeping the same tax rate as a partnership.
That alone is a huge benefit for many small businesses. Like any sole proprietorship or partnership, Sub-S corps pass most of their income onto the shareholders -- but they do so without the double taxation that would ordinarily take place (first at the corporate level and then as individual shareholders). Each shareholder is taxed at the individual rate based on his or her own income.
What other advantages does a Sub-S corp offer?
- The shareholder's personal assets are protected since it creates a barrier between the company's assets and the assets of the private individuals who run that company.
- Pass-through taxation at the state level also allows shareholders to keep more of their earnings from being swallowed up in taxes.
- Shareholders can be employed by the company and draw salaries, just like a regular corporation, which also reduces self-employment tax liability.
- The company has increased credibility in terms of its official status; by incorporating it may more easily qualify for loans or grants than a sole proprietorship or partnership might.
There are some small disadvantages to operating as a Sub-S corporation, including the fact that you must take the time to submit articles of incorporation and pay the fees associated with incorporating. You may also find your company scrutinized more heavily by the IRS in regard to the salaries you pay employees. However, assistance from an experienced business law attorney can help mitigate the problems you may face.