An S-Corporation is a corporation that, for tax purposes, is treated as a "pass-through entity" ("PTE") where the net earnings and profits are passed through to the shareholders' personal tax returns based on their shares of ownership in the business. Unlike a regular "C" corporation where net income is taxed at 21%, an S-Corporation does not pay income tax at the entity-level. This can be an attractive alternative to businesses just starting out and building a strong equity foundation to grow the business.
However, there are pros and cons to filing as an S-Corporation:
Pros:
- Tax-savings on net profit: S-Corporations are not subject to social security and Medicare tax on net profit of the business.
- Shareholders are employees: Shareholders are considered employees and must be paid a "reasonable salary" (I.e. W-2)
- Assets are protected: Personal assets of shareholders are protected from business creditors.
- Cash method of accounting - S-Corporations are not required to use accrual method of accounting
