What Are the Benefits of Forming an S-Corp?

Choosing how to structure a business is an important decision. There are multiple types of business models to choose from, each with its advantages and disadvantages.

Forming an S-corporation could benefit you and your business. An S-corporation is a pass-through entity that elects to pass corporate income, deductions, credits and losses through to its shareholders for federal tax purposes. This entity will file its taxes under S-corporation status with the Internal Revenue Service (IRS). It offers protection from liabilities and prevents the seizure of the shareholder’s personal assets.

There are advantages and disadvantages to every business structure. However, an S-corporation offers significant advantages. The most common benefits are below.

Pass-Through Taxation

S-corporations are not required to pay federal taxes at the corporate level in North Carolina. The shareholders can report business income and losses on their personal income tax returns. This allows business losses to offset other income on the shareholder’s tax return, reducing the income tax they must pay on their personal tax returns.

Asset Protection

S-corporations protect each shareholder’s personal assets. That means shareholders aren’t personally liable for any liabilities or debts from the business. If the business owes any debts, creditors aren’t allowed to come after the shareholder’s personal assets, such as a bank account or home, to offset the amount of money owed.

Avoid Tax Consequences During Ownership Transfer

Owning an S-corporation allows the transfer of ownership without triggering tax consequences. The owner doesn’t have to adhere to complex accounting rules or make any adjustments to the property basis. All that needs to happen is to transfer the ownership interest.

Increased Credibility for the Business

Operating as an S-corporation can be particularly advantageous for a new business. You can establish credibility early on with partners, employees, vendors, and customers from the formal commitment you made to your business venture.

Tax Benefits for Characterization of Income

Shareholders can be employees and receive salaries under an S-corporation business structure. They can also receive tax-free dividends and other distributions.

The owner of the business can reduce self-employment tax liability with a reasonable characterization of the distributions as dividends or salary. Additionally, wages paid and business expenses can be taken as deductions for the corporation.

Accounting with the Cash Method

Typically, S-corporations don’t have to use the accrual method of accounting unless they have inventories. Other corporations are required to utilize the accrual method of accounting unless they have receipts grossing under $5 million. S-corporations can use the cash method of accounting.

Tax Savings with Health Insurance

As an S-corporation, shareholders can save on payroll taxes by purchasing health insurance coverage through the business. It must be part of the income they earn for the tax savings. Additionally, spouses don’t qualify for coverage through the health insurance plan.

Maintain the Same Business Entity

If you switch to an S-corporation from a corporation or LLC, you don’t have to worry about the legal operations of your business. S-corporation is a tax status so you can continue to run your business the same as before without needing to pause operations or make any significant changes.

Speak to a Trusted and Knowledgeable Business Lawyer

Mullen Holland & Cooper P.A. believes business owners should receive dependable legal representation during any stage of operating a business. Whether you’re just starting out or want to switch to an S-corporation structure, you need an experienced legal team by your side to guide you through the process.

Since 1950, our North Carolina business lawyers have provided clients with a range of business-related services. We will protect your interests and handle the complicated tasks on your behalf so you can focus on other matters. When you hire us, our team will be happy to discuss your needs and create the necessary plan to try to reach your goals.

If you’re interested in exploring your options with forming an S-corporation, contact Mullen Holland & Cooper P.A. right now. You can call us at 704-864-6751 or reach out to us online for your consultation.