Should My Business be an S-Corporation?

You may have been told your business should become an S-Corp. Is this good advice? First, let’s take a quick look at the basic requirements. An S-Corp:

1. Can only have one class of stock (i.e. common stock or preferred stock).

2. Cannot generally have more than 100 shareholders.

3. Must be a domestic (USA) corporation.

4. May only have individuals as owners (for example, a C-Corp cannot own an S-Corp).

The above requirements may or may not work well for your business. For example, if you want to grow your business by bringing in big-dollar investors, it might be best for you to form a C-Corp instead of an S-Corp as investors are more likely to give to a C-Corp for a several reasons including that C-Corps allow multiple classes of stock and more than 100 shareholders.

Another consideration is that S-Corps are pass-thru-entities. This means that the owners of the S-Corp pay taxes on the profits and may possibly be able to deduct losses – on their personal tax returns, Form 1040. Is this an advantage or a disadvantage? Depends on your business and your overall tax situation.

Converting your business to an S-Corp may or may not be the right decision for you. Talk to a tax pro to help ensure you’re making a good decision.