Question

after terminating or voluntarily revoking s corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election. What are the pros and cons of an S Corp?

Answer 1

An S corporation combines the liability protection of a corporation with the tax benefits of a smaller entity, avoiding double taxation. Advantages include limited liability for shareholders and the ability to attract investors, but disadvantages include strict governmental rules, shareholder limitation, initial setup costs, and limited operational control for shareholders.

Step-by-step explanation:

Pros and Cons of an S Corporation

An S corporation is a special structure of business that combines the liability protection of a corporation with the tax benefits of a smaller entity, like a partnership or a sole proprietorship. When it comes to advantages, S corporations benefit primarily from their tax structure. They are not subject to double taxation as traditional corporations are; instead, income is reported only once on the shareholders' personal tax returns, thereby avoiding the corporate income tax.

Another advantage includes the limited liability offered to shareholders; their personal assets are protected from the debts and liabilities of the business. Moreover, the S corporation can attract different investors, and it retains the credibility and organizational structure of a corporation, which can be beneficial for the management and growth of the business.

However, there are some downsides to consider. The S corporation status brings with it governmental rules and regulations that may be burdensome. There's also a limitation on the number of shareholders an S corporation can have, which may hinder expansion potential. The initial setup costs for an S corporation can be expensive, and the shareholders may have limited control over the operations, especially if they are not part of the management team.

The S corporation status may be revoked voluntarily or terminated, and if a business wishes to regain this status, they must wait until the beginning of the third tax year after the year the status was terminated to re-elect it. This waiting period should be considered as a factor in long-term business planning.