Subchapter S Corporation is a special type of business that protects the personal assets of people from liquidation (in case of a bankruptcy) while adopting a flow-though system which means that incomes and losses are passed to the shareholders.
According to corporate lawyers, S corporation which is ideal for small-scale business owners because it provides more advantages compared to a standard corporation since it offers appealing tax benefits and limited liability protection.
In this business arrangement, only the income of every shareholder is taxed which means there is no double taxation which is the case in C corporation. (However, some states do not give tax breaks to this kind of business arrangement so it is important to seek the advice of a lawyer who knows the state law.)
This type of business also has its downside since it is subjected to the same requirements of a standard corporation such as the legal and tax services which are costly.
Another disadvantage of S corporation is that it can only issue a common stock, which can make it difficult to raise a capital for business expansion.
Also, the shareholders should adapt the same practices of a corporation such as holding a regular meeting for shareholders and board of directors and voting process where each shareholder can vote for major corporate decisions.
Establishing a subchapter S corporation
• The number of shareholders should not exceed to 35 (according to law, a husband and wife is counted as one shareholder).
• The company cannot have more than one stock.
• It should not have shareholders who are non-resident of the United States.
• The shareholders should register their company as S corporation.
• Shareholders in S corporation should only be private individuals, certain partnerships, non-profit organizations, estates, certain trusts, and certain S corporations.
Subchapter S corporation VS LCC
These two structures of business are almost identical that many entrepreneurs are find it difficult to choose the best one that will provide them the most benefits.
According to corporate lawyers, both provide limited liability protection (protects the personal assets of shareholders such as their cars, houses, and other properties) and follow pass-through entities that eliminate double taxation.
However, there are some major differences between the two types of business:
• S corporation does not allow non-US citizens while LLC has no restriction when it comes to citizenship.
• S corporation limits the number of shareholders while LLC does not.
• S corporation restricts other entities such as C corporations, certain trusts, other S corporations, partnerships, and LLCs. Such restrictions are not present in LLC.
• S corporation only have one class of stock which means it is not flexible in distributing profits compared to LLC.
• In S corporation, the percentage of ownership will determine the percent of income which is not the case of LLC.
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