loss is reported on the owners’ personal tax returns, and any tax due is paidat the individual level.
Many small business owners form a corporation and elect S corp status forpass-through taxation. Other typical advantages include:
•Limited liability protection.
Owners are not typically responsible forbusiness debts and liabilities.
•Easy transfer of ownership.
Ownership is easily transferable throughthe sale of stock.
When a corporation’s owner incurs a disabling illness ordies, the corporation does not cease to exist.
•Raise capital more easily.
Additional capital can be raised by sellingshares of stock.
Corporations may be perceived as a more professional/ legitimate entity than a sole proprietorship or general partnership.
•Lower audit risk.
Generally S corps are audited less frequently thansole proprietorships.
•Tax deductible expenses.
Business expenses may be tax-deductible.
•Self-employment tax savings.
An S corp can offer self-employmenttax savings, since owners who work for the business are classiﬁed asemployees.
Per IRS guidelines, S corporation owners (shareholders) must meet thefollowing criteria:•Number 100 or less.•Must be US citizens/residents (cannot be non-resident aliens).•Cannot be C corporations, other S corporations, limited liabilitycompanies (LLCs), partnerships or certain trusts.
LLCs provide limited liability protection to their owners (called members).Typically, owners are not personally responsible for business debts andliabilities of the company so creditors cannot pursue owners’ personalassets to pay business debts.
Business owners stand to gain many beneﬁts when they register a company