These days, it seems like everyone has an opinion on whether or not your small business should become an S-Corp. That may make you wonder if you need to look into it.
However, while S-Corps are common business entities, they aren't the only option. There are also Sole Proprietorships, Partnerships, and C-Corps – and they all have their pros and cons!
Over the past 60 years of business, our client base at CSI Accounting & Payroll has become 70 percent S-Corps, but that doesn't necessarily make it great for all small businesses. In this article, we’ll cover:
- What an S-Corp is.
- The advantages and disadvantages of being an S-Corp.
- How we have this conversation with our clients.
What Is an S-Corp?
A simple way to think about an S-Corp is to remember “SMALL-Corp.” To be an S-Corp:
- You need to have less than 100 shareholders.
- All shareholders must be U.S. citizens.
- You cannot be publicly traded on the stock exchange.
An S-Corp is the opposite of a Sole Proprietorship in that the business’s taxes are separate from your individual taxes. Read about how we handle individual and sole proprietorship taxes here.
S-Corp Pros
There are some opportunities that are unique to S-Corps. Here are some of the pros that make an S-Corp entity type sound preferable:
- If you had a loss for the year and have an additional job, you may be able to offset your losses against your other job’s W-2.
- An S-Corp is taxed at the individual’s tax rate, which is lower than the tax rate for C-Corps.
- S-Corps are single-taxed on the individual’s tax return, whereas C-Corps are double-taxed.
S-Corp Cons
Some limitations of S-Corps, especially compared to the benefits of other entity types, include:
- You can't accept foreign investors, limiting your opportunities.
- You can't be owned by another business, not allowing for affiliates or subsidiaries, except in special circumstances.
- You can't have more than 100 shareholders, so no funding rounds.
- Your “corporate veil” means you can't use personal accounts to pay for business expenses.
How CSI Addresses S-Corp Discussions
On the rare occasion that a client asks us about S-Corps, they're usually wondering if they should be one. However, it’s much more common for us to notice opportunities for business entity changes and to suggest them.
In your first strategy meeting as a new client, we review your revenue, ownership structure, financial outlook, and what your plan is for your business – or your exit strategy. These help us decide if your current entity is best for your business. For example, it may not be tax-advantageous to become an S-Corp if we see that your revenues are low or you have not made a profit in years.
We also review your business entity with your tax return each year to ensure it's still right for you.
We can always help an LLC become an S-Corp, but guiding you to an attorney is part of that process. An attorney can help you register your business if it is new, as well as help you get an operating agreement that dictates to your shareholders and officers how to operate the business. If you currently have an operating agreement, you may need permission from everyone to change your business entity type.
Let's Discuss Your Ideal Business Entity!
With so many sole proprietorships, partnerships, and corporations to choose from, things can get confusing. Now that you’ve seen our breakdown of what an S-Corp is, its pros and cons, and how we discuss this with our clients, you have a better understanding of whether or not this common corporation entity type is best for you.
If you’re still wondering about S-Corps or another business entity type, CSI is ready to help – addressing it right in our initial strategy meeting. We’re well-versed in S-Corps since they make up a large portion of our client base, but we also know the ins and outs of other business entities after over 50 years of working with small businesses.
Let’s have a conversation about your concerns with choosing an entity type when we connect in a free consultation:
Not ready to talk? That's okay! First, learn more about the advice a monthly accountant can provide:
