What are the advantages of an "S" corporation?

The advantages of an S corporation are:

Avoidance of double taxation of corporate profits distributed as dividends. Earnings are not taxed at the corporate level by the I.R.S. All corporate income passes directly through to the shareholders in proportion to their individual ownership of shares in the corporation, in a paper reporting to the IRS and the shareholder. This income is then taxed only once – at personal rates. A C Corporation must pay a federal corporate income tax. Then, any dividends, which you and other shareholders receive, are taxed a second time by the I.R.S. as personal income.

The S corporation, itself, pays no federal corporate income taxes and is not subject to the corporate alternative minimum tax.

The income or losses of an S corporation are deemed to be the income or losses of its shareholders in direct proportion to their share of ownership in the corporation.

Capital losses of the S corporation pass through to the shareholders who can use them to offset other income, providing that they do not deduct as a loss any amount exceeding their individual investments in, or loans to the corporation tax basis. Such losses may be carried forward indefinitely for possible later use if not currently usable.

An S corporation provides the same legal protection from personal financial liability as a C corporation plus the same ease of transfer of ownership and perpetuity of existence, permitting it to survive its original founders and/or owners.

You do not have to worry about having to pay federal corporate income tax on accumulated earnings. (C corporations that do not distribute their earnings for a taxable year may be subject to a tax on accumulated earnings in excess of a certain figure such as $150,000, which varies according to dividends paid, and other adjustments provided for in the Internal Revenue Code.)

You can pay yourself as high a salary as you wish without running the risk that the I.R.S. will consider it “out of line with comparable salaries in your industry.”

If you have a one-person S corporation, you need not be concerned about the I.R.S. deciding that you are “a personal holding company” and subject, therefore, to additional taxation. (This is a distinct hazard for one-person operators of some types of enterprises.)

Avoidance of double taxation of capital gains, should the corporation or any of its assets be sold.

Stockholder employees of S corporations may participate along with other employees (or individually in the case of a one-person corporation) in qualified retirement plans set up by the S corporation. Under the Tax Equity and Fiscal Responsibility Act (TEFRA), S corporations, C corporations and partnerships are treated with few significant differences with respect to qualified retirement plans such as an HR 10 (Keogh) Plan. A Keogh plan through your S corporation allows you to save up to 20 percent of your income, up to $30,000 per year, in a tax-deferred retirement account – a major tax benefit.

The S corporation can take a tax deduction for the full amount of its contribution to the plan. In the case of shareholder employees, the contribution made on their behalf must be reasonable when compared to compensation they receive. The employee (shareholder or not) is not required to include as income either the S corporation’s contributions or the subsequent earnings from the invested contributions until such time as he/she receives a distribution from the qualified plan.

A shareholder’s cost basis in S corporation stock rises as the shareholder pays taxes on undistributed corporate income. That lowers the taxable capital gain if and when the owner sells the stock. In most cases, the saving should offset a rise in income tax rates.

S corporations are usually permitted to use the cash accounting system, which is the simplest. More than half of all small firms in the USA are taxed as S corporations.