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What is an S corp, and what are its advantages?

Entrepreneurs in Maryland may benefit from learning more about S corporations and the advantages or disadvantages they may offer. The S corporation can be described as a corporation that receives a special type of IRS tax election that allows it to avoid double taxation as a domestic corporation and to shareholders. The IRS considers S corporations to be unique entities that are separate from the owners.

S corporations limit the financial liability of the owners. However, owners of S corporations are not necessarily indemnified against litigation. The actual S corporation is not taxed, but the shareholders are subject to taxation. The losses and profits of the business can actually be recognized on a personal tax return. In order to become an S corporation, the business must meet IRS qualifications and must first be registered as a corporation. The IRS requires shareholders to be paid reasonable compensation based on fair market value. Any additional corporate income may be classified as wages.

Some of the primary advantages of choosing to be an S corporation include the business having an independent life, the additional business expense tax credits and better tax savings. In S corporations, only shareholders who are also employees have their wages subject to employment tax. The rest of the earnings are distributed to the owner at a lower tax rate. However, the disadvantages of S corporations include compensation requirements for shareholders and more stringent operational processes.

Entrepreneurs who need more information about Business formation may benefit from contacting a lawyer. Legal counsel may be able to explain how the finer details of each business structure relate to an entrepreneur's individual business goals. Lawyers may also be able to provide guidance in assisting owners with choosing the business stricture that best coincides with their particular needs.

Source: United States Small Business Administration, "S Corporation", November 08, 2014

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