FreshBooks banner ad

What is an S-Corporation – and Why is it Much Better Than LLC or Partnership?

If you are trying to figure out what kind of entity to form for your new business, it can be difficult to determine the best one for your needs. However, while several options may work, one of the better choices is to form an S-Corporation. There are quite a few advantages to creating this kind of company, and it can be much better than an LLC or partnership.

To help you get a better understanding of how it all works, let’s break down the S-Corp information and see what it’s all about.

Many companies in business disctrits are using S-Corporation

S-Corporation Definition

When filing for a business, you will notice that your options are a sole proprietorship, partnership, LLC, or corporation. However, with the last choice, you can pick between a C or an S.

So, what is S-Corporation or S-Corp?

A corporation (called a C-corp) is a legal entity that separate its assets from the owners’.  You can consider S-Corp as the “lite” version of C-Corp.

One distinctive difference is in term of tax filing. Unlike C-Corp, S-Corp only need to file taxes annually.  What’s more, S-Corp isn’t subject to double taxation.  Even better, S-Corp is a “pass through” entity, which means that profits and losses are tied directly to the finances of the shareholders.

Other than those, it still has all of the same protections and advantages of a regular corporation.

What is “Pass Through?”

If you create a standard C-Corporation, then you are taxed twice. First, taxes are taken out at the corporate level, then again on income that passes down to shareholders. So, essentially, your salary is taxed as an agent of the company, and then any dividends or profits are also taxed when they are paid out.

pass-through business entity

Pass-through means that your salary is tied directly to the financial health of the company, so if you are making profits, then you are only taxed one time when you get paid. Conversely, however, you are also hit with any losses, so there is also that to consider. However, when first starting a company, it can be beneficial to claim such losses as it can give you more leeway in your personal taxes.

Other Benefits

Besides the pass-through designation, S-Corps have the same advantages of a C class company. Your finances are not tied directly to the enterprise, you can structure it how you like, and it’s easy to change ownership.

Overall, as a new business, starting an S-Corporation can be a better option than finding out how to start an LLC or partnership. It’s much more stable and can give you better options on how to run your business.

For more explanation on S-Corporation, these resources can help you out:

About author

Ivan Widjaya
Ivan Widjaya 2650 posts

Ivan Widjaya is the Owner/Editor of Noobpreneur.com, as well as several other blogs. He is a business blogger, web publisher and content marketer for SMEs.

Funding Note

You might also like

Management

A Timely Matter: Workplace Gas Detection Smarts

Gas leaks don’t sound all that interesting, but they can be deadly. So, here’s how to detect one and keep everyone safe. Detecting a Leak Detecting a gas leak is

Tools

Can your Appointment Management Strategy Hurt Your Business?

The American Dream is a simple concept: If you work hard enough, you will prosper. With this mentality, it’s easy to see why entrepreneurship is so appealing in the US.

News

The Process of Protecting Your Trademark

Protecting your trade mark by registration is often overlooked by individuals and businesses alike, but the benefits that can be gained from your trade mark being registered can be long