Starting and running a small business can be a challenging and rewarding experience, but one of the most important decisions a small business owner must make is how to structure the company for tax purposes. One option that many small business owners consider is becoming an S-Corporation, and, in becoming an S-Corp reaping the advantages, but also understanding potential drawbacks.  In this blog, we will dive into the benefits of being taxed as an S-Corporation and how it can help small business owners, as well as look at some potential negatives. However, it’s important to note that the decision to become an S-Corporation will depend on the specific needs and goals of your business, and consulting with a tax professional (such as TSAT🔥) is highly recommended.

First and foremost, let’s start with a quick reminder of what an S-Corp is and how it compares to an LLC:

Moving on…Let’s dive into some benefits of S-Corp tax classification!

  1. Limited Liability Protection: As an S-Corporation, the owners (or shareholders) have limited liability protection, meaning their personal assets are protected in the event of a lawsuit or financial hardship for the business.
  2. Pass-through taxation: One of the biggest advantages of being taxed as an S-Corporation is that it allows for pass-through taxation. This means that the business’s income is passed through to the individual shareholders, who then report it on their personal tax returns. This can result in a significant tax savings for small business owners.
  3. Flexibility in Tax Planning: S-Corporations have the ability to distribute profits and losses among shareholders in a way that reduces overall tax liability. This can be especially beneficial for small business owners who are looking for ways to minimize their tax burden.
  4. Potential for Lower Self-Employment Taxes: S-Corporations may be able to reduce the self-employment taxes paid by their owners, as they are considered employees of the company and can receive a salary instead of distributions.
  5. Potential for Increased Deductions: S-Corporations may be able to take advantage of certain deductions, such as health insurance and retirement plans, that are not available to sole proprietors or partnerships.
  6. Potential for Greater Credibility: Forming an S-Corporation can give a small business a sense of legitimacy and professionalism, which can help attract investors and customers.
  7. Easier to Raise Capital: S-Corporations can issue stocks to raise capital, which can be a more attractive option for investors compared to a sole proprietorship or partnership.
  8. Potential for Long-Term Growth: S-Corporations have the potential for long-term growth, as they can retain earnings and reinvest them into the business.
  9. Potential for Estate Planning: S-Corporations can be a useful tool for estate planning, as the ownership of the company can be transferred to family members or other beneficiaries.
  10. Potential for Succession Planning: S-Corporations can make it easier for small business owners to plan for the future of their company, including succession planning and transferring ownership to new leadership.
  11. Retirement planning: Small business owners who are taxed as an S-Corporation can take advantage of retirement plans such as SEP or 401(k) plans, which can provide significant tax advantages for both the business and the shareholders.

Interested in learning more, check out TSAT’s FREE S-Corp Resource Vault! 

Now, let’s take a look at some potential drawbacks…

Corporate formalities:

Corporate formalities refer to the legal requirements that a corporation must adhere to, such as holding regular meetings of shareholders and directors, keeping accurate records of business transactions, and following specific procedures for decision-making. These formalities can be a drawback of an S-Corp because they can be time-consuming and require additional administrative work.

For example, an S-Corp must hold an annual meeting of shareholders and keep minutes of the meeting. This means that the shareholders must gather in person or via a virtual meeting and take minutes of the proceedings. This can be difficult if shareholders are located in different parts of the country and scheduling a meeting can be a challenge. Additionally, if the minutes are not kept properly, it can lead to legal issues.

Another example is that S-Corp must keep accurate records of all transactions, including invoices, bills, and receipts. This means that the business must have a proper bookkeeping system in place and keep all records up to date. This can be time-consuming and requires someone with bookkeeping knowledge, which can be a drawback for small business owners who are already busy with other aspects of running their business.

Rigid profit and loss allocation:

Because it is a corporation, an S corporation is required to allocate profits and losses among the owners based strictly on the percentage of ownership or number of shares held. Another drawback is that it has rigid rules about who can become a shareholder. For instance, if you are a founder, you may receive a disproportionate share of profits when you transfer your interest.

There are also restrictions on the types of entities that can be a shareholder in an S corporation. Among these are trusts, estates, and certain tax-exempt organizations. These restrictions make it harder for you to grow your business quickly.

Stringent requirements:

In order to be eligible to make an S corporation —and to continue to operate as an S corporation—the corporation must meet strict requirements on the number and type of shareholders and types of shares. These rules are imposed by federal law, and not state corporation law. Some include, but not limited to:

  • There cannot be more than 100 shareholders (although some family members can be counted as a single shareholder)
  • Only individuals, certain estates and trusts, and certain tax-exempt organizations can be shareholders
  • There can only be one class of stock (although differences in voting rights are permitted)

In conclusion, Small Business Owners should consider being taxed as an S-Corporation as it offers a range of benefits and can help them plan for the long-term growth and success of their business. However, it is important to consult with a tax professional to determine if this is the best option for the specific business and to understand the compliance and administration requirements

We know that’s a lot to think about, that’s why we’re here to help! Let TSAT become your Trusted Advisor!

Your Trusted Advisor… At TSAT, we know that a great businesses need to operate at high levels of service, accuracy, reliability, and throughput. We also know that the only way to ensure these things are achieved is to develop a comprehensive set of accounting and finance policies and procedures and to regularly train all personnel involved in the management and control of the company’s software. Only by taking steps toward accounting, quality assurance, and finances can a small business accounting department expand its business and improve its profit margins. It takes a little work to make sure that every aspect of small business accounting is running at full capacity, and we are here to help!

Here at TSAT, we are not simply bookkeepers. We work with you to provide a 360-degree strategic financial advice, including small business operations and investment guidance. We will help you stay ahead of the curve when it small business or personal investments!

If you are a gig worker or small business owner looking to grow your business, TSAT’s AMAZING Trusted team considers much more than just your taxes!


TSAT’s is your Trusted Advisor and will let you focus on your business’s core competencies! Whether you have a small business or you need help personally, TSAT can give you HOPE! Call us today! 

Phone: (417) 208-2858