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Benefits and drawbacks of forming an S corporation

Those planning on establishing a business in Maryland often face a dizzying array of choices to make. One possible option for such individuals is to incorporate their company as an S corporation. This infers a number of advantages and disadvantages, making it important for those considering this path to learn more about how it might affect them. While this information is intended to help future business owners educate themselves on the details of forming an S corporation, it should not be considered as replacement for the expert advice of a qualified legal professional.

S corporations enjoy special tax benefits that are not available to sole proprietorships and other similar entities. This is because an S corporation's shareholders agree to divide the company's income and losses among themselves, which is taxed individually for each member. This means that S corporations generally do not pay any federal income tax. This can help save on the self-employment tax incurred by operating a sole proprietorship, but these savings may not be worth the costs for some new companies.

Of course, S corporations also have the same limited liability benefits as any other corporations, meaning that creditors may not pursue the personal assets of the corporations' owners in order to collect the business's debt. Additionally, corporations allow for higher contribution limits on workers' retirement plans. This allows one to better save for retirement as well as reduce the amount of one's yearly income eligible for taxation. However, forming a corporation also entails additional fees and expenses, requires the business to follow more stringent requirements regarding record-keeping and necessitates regular meetings between directors and shareholders.

As with any major business decision, one should carefully weigh the benefits and drawbacks of forming an S corporation before doing so. It is generally helpful to discuss the decision with an attorney, consultant or other business expert.

Source: Orange County Register, "S corporations provide benefits but add paperwork, costs," Patrick Harper, Oct. 8, 2012

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