Electing to Be an S Corporation: Benefits You Need to Know

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published 16 October 2024

With only a couple of months left in 2024, many business owners are preparing their year-end taxes. For some, this may include refining their financial structures, specifically working to minimize tax implications moving forward. One method that is gaining traction is the S corporation election. This strategy has the potential to help business owners alleviate employment taxes and foster financial success.

The concept of pass-through taxation distinguishes S corporations, allowing business profits to seamlessly flow to individual shareholders without encountering the complexities of double taxation. Unlike conventional C corporations, where profits face taxation at both corporate and individual levels, S corporations permit direct passage of profits to shareholders, enhancing returns for those integral to the business' success.

Five other benefits of being an S corporation:

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1. Reduced self-employment tax burden

Active business owners often grapple with substantial self-employment tax burdens. However, adopting the S corporation election could be one way to manage this burden effectively. By partitioning income into a reasonable salary and distributions, entrepreneurs can potentially diminish their self-employment tax liability, offering financial relief and structuring compensation with greater flexibility.

2. Flexibility in income distribution

As for income distribution, S corporations present a notable advantage in their capacity to flexibly distribute income among shareholders. This adaptability facilitates a strategic and personalized approach to income distribution, accommodating diverse financial needs.

Whether reinvesting in the business, rewarding diligent employees or allocating funds for future initiatives, the versatility of S corporations proves transformative.

3. Protection for personal assets

Entrepreneurial ventures entail inherent risks, but S corporations furnish a crucial layer of protection for personal assets. The limited liability shield safeguards personal properties from the risks and liabilities associated with business operations, allowing business leaders to enjoy the fruits of their labor without jeopardizing their personal holdings.

4. Smoother succession and transfer of ownership

Especially pertinent to family-owned enterprises or those contemplating ownership transitions, the S corporation structure streamlines the transfer of ownership. The capability to sell stock simplifies the transition, ensuring uninterrupted business operations. This attribute renders S corporations an attractive option for those prioritizing long-term stability and a seamless transition of their business legacy.

5. Flexibility in retirement planning

Beyond immediate considerations, S corporation elections offer advantages in the realm of retirement planning. The flexibility in structuring retirement plans contributes to the long-term financial stability of both the business and its employees. This strategic move aligns to build a secure financial future, a consideration increasingly relevant for business stakeholders.

Qualifications to obtain S corporation status

There are several requirements a business must meet to qualify for S corporation status. First, the business must be a domestic corporation. Shareholders must be individuals, certain trusts and estates. They cannot be partnerships, other corporations or non-resident alien shareholders according to the IRS.

For specific instructions on how to become an S corporation, visit IRS.gov.

In the intricate intersection of business and taxation, opting for an S corporation election extends beyond numerical considerations. It is a strategic positioning of the business for success, amalgamating tax efficiency, operational flexibility and long-term financial planning. Collaborating with experts in tax planning, legal advisories, investment strategies and philanthropy consultation is key to utilizing the S corporation election effectively. As you chart your business trajectory, recognize the potency of opting for an S corporation — a decision with the potential to redefine your venture's financial trajectory.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Derek Miser serves as Chief Managing Member at Miser Wealth Partners, LLC, located in Knoxville, Tenn., and Tellico Village, Tenn. Miser Wealth Partners delivers family office services to successful retirees and entrepreneurs nationwide and in Puerto Rico. He recently published his first book, "Golden Years, Greener Pockets." This guide to tax efficiency for retirees is an excellent read for anyone contemplating or already retired.