Ideal Circumstances For An S Corporation
- Potential to reduce payroll taxes or self-employment taxes.
- The 2010 Health Care Act appears to be excluding earnings from S-Corporations with respect to active owners from the 3.8% surtax.
- A sole owner.
- Using the corporate minute book to document tax strategies and other corporate activity.
- Small personal service companies.
Reasons Not To Operate As An S Corporation
- Annoying restrictions on who can or cannot be a shareholder.
- No basis increases for owners who guarantee corporate debt.
- In certain circumstances the S election can be inadvertently revoked.
- You are a minority owner and distributions to pay for income taxes are not required.
- Difficulty exists in keeping track of numerous shareholders and/or their addresses.
- In some circumstances an S corporation does pay income taxes at the corporate level and this tends to defeat a primary advantage of an S corporation.
- Companies that are formed for passive investment purposes versus operating assets in a trade or business.
- Different classes of stock, such as preferred stock and common stock.
- Passive investors would likely prefer C corporation dividends taxed at preferential dividend rates.