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The pros of forming an S corporation

On Behalf of | Apr 27, 2021 | Business Formation |

Texas entrepreneurs looking to set up shop will have a big decision to make: what type of business entity they want to set their business up as. An S corporation is not one that many people are overly familiar with. However, it provides many benefits for the business owner.

Pass-through taxation

An S corporation is not a separate type of business entity. Rather, it’s a tax structure that a business may choose to operate under. For example, business formation planning allows an LLC or C corporation to designate their tax status as an S corporation as opposed to their default business entity tax structure.

An S corporation offers the benefit of being a pass-through entity. This means that the corporation doesn’t have to pay taxes. Rather, the shareholders are responsible for notating gains or losses for the year and must pay taxes based on their percentage of ownership. This avoids the common problem of double taxation that C corporations have.

Protection of personal assets

Another major benefit of identifying as an S corporation is the protection of personal assets. In other common business entities, like a sole proprietorship, the business owner is personally responsible for the business’s debts. This means that if the business fails, the owner is responsible for paying off all the loans that the business had out. An S corporation status designates the business owner, known as a member, as a separate entity from the business. This allows the member to not be personally responsible for any debt that the business owes.

When you’re just starting a business, there are a lot of questions that you may have. Understanding the ideal business formation strategy for you can help ensure a stable financial future for your business. It’s always best to talk with an attorney about the pros and cons of each type of business entity before settling on one.