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.