A Corporation is an entity that is legal under the state law. Therefore, it has ability to manage its affairs by either holding the properties or borrowing money. That is, it can perform all activities that an individual person can perform. In my opinion, S corporation is the most popular form of business among other business entities such partnership, sole proprietor, and limited liability company because they insulate their owners from personal liabilities (Schlesinger: 2). Since it operates under the state laws, its creditors should only have access to the assets for the debts of the business. Hence, the business assets are protected from risks. Similarly, it operates separately from its owners but files all government requirements regarding reports of taxation.
On the other hand, when a corporation fails to conduct the business that is separate, the owners will experience some losses of insulation from the liabilities. For instance, a corporation that is owned by a wealthy business person is sued for causing an automobile accident. In this scenario, the corporation had no assets that were not subjected to the liens of valid creditors but had only the minimum insurance requirement. Therefore, the owner of the business who had a lot of wealth that is protected from the liability by the corporation will not be liable for the damages.
It is the only business entity that can deduct the expenses such as healthcare benefits and retirement plans is a corporation. Consequently, these expenses will reduce the taxable proceeds of the corporation, and this allows the workers to enjoy some valuable benefits that are not subject to tax on income (Johnson and Campbell: 637). Corporations have the ability to provide their owners with the required structure of capital that is needed to accomplish the business goals. That is it is flexible in raising start-up funds for the business. It has a three tire system of control where the stockholders are to elect the directors which will elect the officers of the corporation.
It can acquire capital from external sources through bank loans, and venture capitals and this make corporations to be the best business entity. Similarly, it can also sell its shares thus securing some additional funds for expansion. In contrary, the limited liability companies have some legal entities but is difficult for the owners to use their personal net worth in securing credit facilities for the business. S corporations offer protection to its assets. Therefore, conducting business as an S corporation will provide the business owners with protection against the limited liability. The limited liability will protect the shareholders from various claims of business creditors. The claims can either arise from business contracts or litigations.
S corporations are considered to be a pass-through business entity for the purpose of federal income taxation. Therefore, it acts as its taxpayer that reports its income and expenses on its personal tax return. Moreover, S corporations pass the business income, deductions concerning taxes, losses, and credits through the owners of the business instead of being taxed at the corporate level. The main objective of this benefit is to prevent the occurrence of double taxation that normally arise during the taxation of dividend incomes at the corporate and the shareholders levels.
Regarding the payment of salaries and dividends, owners of S corporations can choose the reception of payment of both wages and dividends from the corporation. Consequently, this will lead to an overall decline in tax bills because the dividends will be subject to self-employment tax (Johnson and Campbell: 637). The corporation can further make a deduction from the total cost of the salaries that is paid by making a computation on the amount of income that is passing through the shareholders of the company. However, the separation that exists between wages and dividends should be reasonable as per the IRS. The IRS will supervise all types of business transactions closely, and it will, therefore, intervene to re-characterize the incomes especially when it feels that payments were not reasonable. S corporations are popularly used due to their ease of conversion. That is they can be converted easily to form a C corporation than limited liability companies. Moreover, the status of S corporation is more about the election of federal tax and there is no paperwork that is needed in the event of terminating the elections. In contrary, the limited liability companies must make a formal conversion to a corporation by filling in the relevant documents with the secretary of the state.
Conclusion
S corporations are the best choice of business entity especially if one is looking for the structure of the company that has a pass- through taxation systems. This is because it permits the payment of both salary and dividends. On the other hand, there are some legal procedures that have to be accomplished for the election process to be complete and for the election to be valid, this process has to be fulfilled. The allocation of income between the wages and dividends have to be balanced against the inadequate flexibility. Otherwise, there will be extensive procedures on S corporations.
Bibliography
Johnson, Linda, and Alan Campbell. Federal Tax Course (2009). U.S.A: CCH, 2008. Print.
Schlesinger, Michael. Practical Guide to S Corporations. 4th ed. U.S.A: CCH, 2007. Print.
