Sole proprietorship, partnership, corporation, LLCs, but which one is right for you? Many people are familiar with corporations, but they assume that corporations are reserved for large companies such as McDonalds or Microsoft. There exists a smaller kind of corporation, it’s called an S corporation and it’s a great business structure for multiple kinds of businesses including farmers.
Some of the benefits that exist for S corporations is the tax breaks and liability protections that are afforded. S corporations have the same liability protections as C corporations, so their shareholders are virtually completely protected from lawsuit or credit claims. Furthermore, under current tax law an S corporation is allowed to deduct up to 20% of their income on their yearly federal taxes. For example, if a corporation makes $100,000 over a year, the corporation may deduct $20,000 off their income (there are limitations on businesses this applies to). Another benefit of an S corporation is their ability to pay taxes like other pass through entities and only be taxed once. This is in contradiction to C corporations which owners must pay taxes twice (once on the corporation, once for personal).
You may ask yourself why more businesses don’t classify as an S corporation and it might be due to some of the restrictions on S corporations. Many businesses that offer professional services cannot receive the 20% deduction on taxes so the owners choose a different business structure. Additionally, if you employ over 100 people, an S corporation cannot be formed as well.
If you have questions about business or corporate structure, and whether restructuring is better for your business, call the Center for Financial, Legal & Tax services.