What are the benefits of an S corp?
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S Corporations offer several key benefits for business owners:
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Tax Savings on Self-Employment Taxes: One major advantage of an S Corp is the potential reduction in self-employment taxes. Instead of paying self-employment taxes on the entire profit, S Corp owners can split income into a salary and distributions. The salary is subject to self-employment taxes, but distributions are not, resulting in significant tax savings 1 2.
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Liability Protection: Incorporating as an S Corp provides liability protection, separating personal and business assets. This means that if the business incurs debt or is sued, your personal assets like your home and car are generally protected 3 4.
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Attraction of Investment and Credibility: Structuring as an S Corp can enhance credibility and make it easier to attract investors. It also provides a formal structure for managing operations, which can be appealing to potential investors and business partners 5.
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Qualified Business Income (QBI) Deduction: S Corps can take advantage of the QBI deduction, which allows eligible taxpayers to deduct up to 20% of their qualified business income. This deduction can provide additional tax savings 6.
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Flexibility with Income Splitting: The ability to split income between salary and distributions offers flexibility in managing personal income tax obligations and can also provide benefits in terms of retirement contributions and other financial planning strategies 1 2.
However, it's important to note that S Corps come with increased administrative responsibilities, such as the need for formal payroll, additional bookkeeping, and potential higher costs for professional services. These factors should be considered to determine if the tax savings outweigh the administrative burden 6 7.
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