What Are the Advantages & Disadvantages of a Subchapter S Corporation?
A subchapter S corporation is created when a regular corporation files paperwork with the Internal Revenue Service. Operating as an S corporation will have significant legal and tax ramifications on business owners of the company. One of the advantages of operating as an S corporation is that the company will have a separate existence that can exceed the life of the S corporation's initial shareholders.
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Liability
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One of the biggest advantages gained by operating as an S corporation concerns the issue of personal asset protection. Shareholders, directors and employees of an S corporation are not personally liable for debts, lawsuits and liabilities incurred by the company. A creditor of an S corporation may not pursue a business owner's personal assets in an effort to recover the company's debts. In addition, a shareholder's personal creditors are not allowed to take assets from an S corporation as compensation for the personal debts of a shareholder.
Ownership Restrictions
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A drawback of operating as an S corporation is that there are restrictions involved in terms of who can and cannot own shares of the company. For example, individuals who are not U.S. citizens or resident aliens of the U.S. may not participate as owners of an S corporation. Furthermore, other corporations, limited-liability companies, partnerships and foreign businesses are not allowed to act as shareholders of an S corporation. Only individuals who are U.S. citizens or resident aliens are allowed to participate in the ownership of an S corporation. As far as other businesses are concerned, only certain trusts and estates are allowed to act as owners of an S corporation.
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Taxation
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The IRS treats S corporations like pass-through entities. This is a major benefit of forming an S corporation, since the owners of the company are allowed to pass their share of company profits and losses directly to their individual or joint income tax return. With this being the case, owners of an S corporation will be able to use company losses to offset income gained from other sources. S corporations are not required to file a tax return with the IRS on the business level which can save the company a significant amount of time and money.
Size
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A downside to forming an S corporation concerns the size limitation imposed on S corporations. An S corporation may have no more than 100 shareholders participating in the company's ownership. All 50 states allow an S corporation to form with a single owner, but having more than 100 shareholders means the company will be treated like a regular C corporation.
Stock
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The ability to raise capital by issuing stock is another advantage enjoyed by an S corporation. S corporations may find it easier to attract investors in comparison to other business entities since a corporate business structure has an unlimited life, and investors are not responsible for the S corporation's debts. Issuing stock can help an S corporation meet its existing obligations, upgrade the company's facilities or expand the business.
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