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What are some of the benefits of forming as an S corporation?

Although setting up a business as a limited liability company (LLC) has long been a preferred option of many small business owners, an S corporation has also been quite popular.

An S corporation provides many of the same legal protections that LLCs offer with many more tax benefits that they don't. In terms of taxation, S corporations allow the businesses' profits and losses to be claimed directly on the personal income tax returns of the individual shareholders. This is quite an attractive option for these individuals as it avoids them having to pay federal taxes more than once.

Although S corporations may be attractive to many, it's not an incorporation option that every business owner may qualify for. Only ones that have 75 or less shareholders may be incorporated as such.

Additionally, restrictions exist in terms of who is allowed to assume the role of shareholders. In this case, only certain trusts or estates, nonprofit charities, individuals, other S corporations or partnerships are allowed to become shareholders in this type of business entity.

Another attribute that attracts business owners to form as S corporations is that they're required to use a cash accounting process as opposed to an accrual one. The main benefit to using this type of accounting system is that it allows for expenses to be deducted as they're paid. It requires taxes to be paid on income as it's received, though.

Incorporating as an S corporation also has some downsides though. They're often taxed at a higher tax rate in alignment with other types of corporate entities in the United States. They are restricted in that they can only issue stock, a factor that can complicate efforts to raise funds to support the organization.

In learning more about your plans and expectations for your organization, a St. George, Utah, business organizations attorney can advise you as to whether setting up an S corporation may be right for you.

Source: Entrepreneur Magazine, "Subchapter S corporation," accessed Jan. 05, 2018

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