What are the primary advantages of forming an S corporation?

The primary advantages of forming an S corporation (often simply called an "S corp") include:

1. Pass-through Taxation - Perhaps the most significant benefit of an S corp is the pass-through taxation feature. Generally, S corps do not pay federal income taxes at the corporate level; instead, profits and losses are reported on the personal income tax returns of the shareholders. This means only one level of federal tax is paid, avoiding the double taxation that can occur with C corporations, which are taxed at both the corporate and shareholder levels.

2. Limited Liability Protection - Similar to a C corporation, an S corp provides limited liability protection to its shareholders. This means that the shareholders are typically not personally responsible for the business debts and liabilities of the corporation. Their risk of loss is limited to their investment in the business.

3. Self-Employment Tax Savings - If an S corp generates income, the income passed through to the shareholders is not subject to self-employment tax, as opposed to income from a sole proprietorship or general partnership. However, shareholders who work for the company must pay themselves a "reasonable compensation" in the form of wages, which are subject to employment taxes.

4. Investment Opportunities - S corps can attract investors through the sale of shares of stock, although the number and type of allowable shareholders are limited compared to a C corp. This can provide a means of raising capital without incurring debt.

5. Easier Transfer of Ownership - Ownership interests in an S corp can be easily transferred without triggering significant tax consequences or disturbing the operation of the corporation, providing a clear method for succession or exiting the investment.