Have your cake and eat it too: the S corporation

Don’t let the technocratic name fool you: the S-corporation is one of the greatest IRS inventions ever. Let me explain.

Sole proprietorships are easy to set up, and are taxed at the same tax rates as individuals.  However, their owners are subject to unlimited liability.  This means that you – the owner – are personally responsible for all debts of your business.  Not good.

If you are a partner in a partnership, you will also be taxed at individual rates (good) but get stuck with unlimited liability (not good).

strawberry cake by Kanko*, on Flickr

The most popular alternative is incorporation.  Corporations provide their owners with limited liability (good), but subject them to double-taxation (very bad).  Seems like you can’t win.

With S-corporations, however, you can have your cake and eat it too.  An S-corporation is taxed like a partnership.  The individual owner-stockholders pay individual tax rates, and aren’t subject to double-taxation.   But they also enjoy limited liability.  The best of both worlds.

Not every corporation can elect S-corporation status.  More information about S-corporations  (also known as “Subchapter-S corporations”) can be found here.