Sub S Corporations
Advantages and Disadvantages



Sub S Corporations Advantages and Disadvantages

Should I choose an Sub S Corporation?




Sub S Corporation:

A tax election only; this election enables the shareholder to treat the earnings and profits as distributions, and have them pass thru directly to their personal tax return. The catch here is that the shareholder, if working for the company, and if there is a profit, must pay herself wages, and it must meet standards of "reasonable compensation". This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.



Sub S Corporation Advantages

  • Owners have limited personal liability for business debts
  • Owners report their share of corporate profit or loss on their personal tax returns
  • Owners can use corporate loss to offset income from other sources

Sub S Corporation Disadvantages

  • More expensive to create than partnership or sole proprietorship
  • More paperwork than for a limited liability company, which offers similar advantages
  • Income must be allocated to owners according to their ownership interests
  • Fringe benefits limited for owners who own more than 2% of shares.
Federal Tax Forms for Sub S Corporations
  • Form 1120S: Income Tax Return for S Corporation
  • 1120S K-1: Shareholder's Share of Income, Credit, Deductions
  • Form 4625 Depreciation
  • Form 1040: Individual Income Tax Return
  • Schedule E: Supplemental Income and Loss
  • Schedule SE: Self-Employment Tax
  • Form 1040-ES: Estimated Tax for Individuals



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