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What are the pros and cons of forming an S-corporation?

On Behalf of | Jan 15, 2025 | Business Law |

Your long-term plans for a business affect which structure is right for it. While limited liability companies (LLCs) are a popular choice, forming an S-corporation (or S-corp) can be advantageous. Understanding the pros and cons can help you decide the right fit for your Oregon business. 

Advantages of forming an S-corporation

One major advantage of an S-corp is its tax benefits. Unlike a traditional corporation (C-corp), an S-corp avoids double taxation. Business profits pass directly to shareholders who only face taxes on their personal income, not at the corporate level. This setup can reduce the overall tax burden for owners.

S-corporations also allow for employee-owners to receive a portion of income as wages, which are subject to payroll taxes, and another portion as distributions, which are not. This can lead to significant savings on self-employment taxes compared to LLCs.

Another benefit is that S-corps have a clear structure, with officers and directors managing operations. This can make it easier to attract investors and maintain accountability. It may also simplify succession planning.

Disadvantages of an S-corporation

However, S-corps have strict rules that can limit flexibility. For example, they can only have up to 100 shareholders, and all must be U.S. citizens or residents. This restriction can make it harder to expand or attract international investors.

S-corporations also require more formalities than LLCs, such as holding annual meetings, maintaining detailed records, and adhering to specific operational processes. For smaller businesses, these requirements may feel burdensome.

In contrast, LLCs are generally easier to manage, with fewer regulatory requirements and greater flexibility in ownership and operations. However, LLC owners may face higher self-employment taxes, as all profits are typically subject to these taxes, unlike S-corp distributions.

Deciding between an S-corporation and an LLC depends on your business needs and long-term goals. Consider the pros and cons carefully to form the correct structure for your Oregon business.