The Pros & Cons
| The Pros | • Liability protection similar to that of C-corporations. • No double taxation of profits. • Ownership is easily transferred through the sale of stock. • Separate entity from stockholders. • Self-employment tax is not assessed on the entire profit of the business. • Losses can offset shareholders' other taxable income. |
| The Cons | • Complex and expensive to create and maintain. • Requires a separate tax return. • Requires regular board of directors' meetings and minutes. • Requires tracking of basis for stockholders. • Ownership is limited to specific types of entities. • Deductibility of fringe benefits for owner-employees is limited. |
| Is a Good Fit For | • Businesses with significant exposure to liability. |
Additional Points
There are many ways to create a corporation and those are different in each state. However, it is generally done by the majority stockholder(s) or by someone hired to create the corporation for them. There are many firms that specialize in creating corporations for people. Unfortunately, they sometimes make mistakes and unless you know the basics that have been discussed in this course, you may not catch it until tax filing time.
The biggest mistake that seems to be made is for the firm hired (or the stockholder) to file for the corporation at the state level correctly, but forget to file the Form 2553 at the IRS to obtain the S election in a timely manner. If this happens, a process is in place to apply for an exception. The IRS usually grants the exception if a reasonable excuse is given to not filing on time. A tax advisor specializing in corporations should be able to help do this properly.