Using an “S” Corporation as the Legal Structure for your Small Business

A corporation is much more complex and expensive to set up than any of the other legal business structures and small businesses usually shy away from this type of legal entity in the beginning.  One can always change to a corporate structure after their business is established and up and running smoothly. 

I am always a fan of “keep it simple, stupid.”

In just about any initial undertaking – I find this to be especially true when talking about a small business start-up.  People have told me all my life to go slowly rather than fast at the beginning.  I have not always heeded that advice in the past, and I have learned the hard way. 

Save money and complexity at the onset.  There will be ample time for you to expand into more complex issues with your small business once you have developed a dependable track record.

If you are going to incorporate the S corporation is more attractive to small business owners than a regular (or C) corporation.  An S Corporation has the advantage of some very appealing tax benefits and still provides small business owners with liability of a corporation.  Just like a general partnership, income and losses “pass through” to the shareholders and are included on their individual tax returns.  There is just one level of federal tax to pay.  That’s a good thing.

For the owners of S corporations who don’t have inventory, they can use the cash method of accounting.  The cash method is much simpler to account for than the accrual method of accounting.  In the cash method of accounting, income is taxable when it is received and the expenses are deductible when they are paid.  A simple concept if ever I heard of one!

Under the rules of an S Corporation a small business can have up to 100 investors.  It is therefore possible to have more investors and attract more capital more easily – in theory at least.

But like everything else in life there is a yin and there is a yang,

S corporations are subject to many of the same rules that apply to all corporations.  This means more expense to the small business in the form of legal and accounting costs.

Additionally, small businesses in an “S” corporation must:

1.  File articles of incorporation

2.  Keep corporate minutes

3.  Allow shareholders to vote on major corporate decisions (most small business owners really have an aversion to this part)

4.  Hold regular shareholders meetings

Even if you have the 100 investors that you are allowed to have under this type of legal structure for you small business, and S corporation can only issue one class of stock.  According to experts, this could make it harder to raise capital.

As a side note – S corporations can only be owned by individuals, estates, and certain types of trusts.

Be sure to check with an attorney and a CPA before deciding on the legal structure of your small business.  Regulations change for the legal structures often.

Good Luck!