Disadvantages of S Corporation Status
An S corporation is a unique type of corporation status that is offered in many states in the United States. An S corporation has the advantage of avoiding double taxation, because the corporation itself is not taxed as an entity. Instead, only the income that is passed on to shareholders of the corporation is taxed. This differs from a C corporation, which requires the business itself to be taxed as well as the shareholders. However, there are some distinct disadvantages of the S corporation structure to consider before deciding on the best structure for your new business.
Cons to S Corporation
While pass-through taxation can be a major advantage for some businesses, the disadvantages may outweigh the positive aspects of S corporation status. Some cons to forming an S corporation include:
- Citizenship restrictions: All owners of an S corporation must be U.S. citizens or permanent residents
- More paperwork: Forming an S corporation requires creating an “articles of incorporation” document as part of the formation process
- Shareholder limit: An S corporation may have no more than 100 shareholders
- More costly to establish: There are more fees and tax considerations when starting an S corporation versus other types of business entities
These limitations may make the S corporation a less than optimal choice for your business. A Texas business formation expert can help to clarify the advantages and disadvantages of each type of entity so that you can make the most informed decision possible.
Contact Us
To learn more about S corporations and the other types of legal business structures available to you, contact the Texas business formation professionals of Texas Legal Entities by calling 512-472-2431.
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