Even though the initial cost to form a corporation is substantial and there is a lot of paperwork, the corporate form is beneficial to the shareholders in the long term. James Woodruff has been a management consultant to more than 1, small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues.
James has been writing business and finance related topics for work. By Jim Woodruff Updated March 04, The Tax Advantages of an S Corp vs. Owners have limited liability. The owners' assets are protected from the debts and liabilities of the corporation.
Shareholders are not held liable for business losses. Easier to raise capital. It is easier to attract capital with the sale of stocks and bonds. A corporation can have an unlimited number of investors. Easy to transfer ownership. Shares of stock can be sold.
Corporations have perpetual lifetimes. The entity continues to exist beyond the deaths of the owners. Certain expenses are tax deductible. Ask a new question Get plagiarism-free solution within 48 hours.
Review Please. Next Previous. Related Questions. Which of the following is true of a corporation? A A corporation cannot be privately hold. B The earnings of a corporation may be subject to double taxation. C A corporation has a limited life. D The stockholders of a corporation Organizing a corporation is as simple as filing an application with the appropriate state agency. The approved application establishes the corporation as a legal entity, giving the corporation many of the same legal rights and risks as individuals, Exam Sample Qu A partnership is a legal entity separate from its owners.
X partnership is subject to federal income taxes. A disadvantage of partnerships is the mutual agency of all p. Each partnership must have a written partnership agreement Another advantage to the corporation designation is the ease of funding. Corporations can transfer ownership by buying or selling its shares. Public corporations have a much easier time than private companies to exchange shares, but regardless, corporations offer its members the easiest means for transferring ownership.
Unlike other businesses, a corporation has no limit to its life. If owners die or want to dissolve their shares, they simply sell or transfer their ownership to someone else.
The only way a corporation ends is if it deliberately ended through liquidation or other means. Another benefit to the corporation is the tax liability separation. A corporation's taxes are independent of your personal taxes.
As an owner, you only pay taxes on the salary or dividends paid to you by the corporation. The corporation has separate corporate taxes which are taxed at a separate rate than your individual taxes. Forming a corporation does have disadvantages. If you want to form a corporation, it will require investing more money and time than if you went with another business entity.
You will need to file the appropriate registration, fulfill capital requirements, and formally list your corporate directors among other things. Additionally, there are legal requirements and annual documentation that must be submitted. Because there are many government agencies that monitor corporations, fulfilling the paperwork necessary to meet all requirements can be cumbersome.
Another disadvantage to corporations is the double taxation that happens when dividends are paid to shareholders. Corporate taxes must be paid on profit at the corporate-level and again at the individual level. This double taxation can be avoided if your corporation is able to file as an S corporation. The S corporation files a Form to the IRS which eliminates the double taxation that C corporations are forced to pay. After forming your S corporation, you will be allowed to avoid double taxation by passing certain financial issues from your corporation to your shareholders:.
Certain restrictions will be placed based on who can sit on your corporation's board of directors. For example, with a small corporation, two members of the same family are not allowed to serve as corporate directors at the same time.
Another tax disadvantage of corporations involves dividends. When a corporation pays dividends to its shareholders , the company is not allowed to deduct these payments from its income. Because corporations must pay a variety of taxes, and may earn different types of incomes, these companies typically must handle a tremendous volume of paperwork which would not be required with another business entity.
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