Operating a company as a sole proprietorship can be risky because of the liability issues you take on personally. If you are worried about these risks, you could incorporate your business. Choosing a standard corporation is one option, but another option is choosing to form an S corporation. While both options have similarities, many business owners choose S corporations because of the tax advantages they offer.

What Is an S Corporation?

An S corporation is a type of business structure that is relatively easy to set up. To form an S corporation, you must file Articles of Incorporation with the state you live in and fill out an application. You must also choose a business name and create an agreement with the other owners of the business. Anyone that owns a portion of the business is called a shareholder and has rights to the business.

S corporations are often thought of as a mixture of a standard corporation and a sole proprietorship. They are like corporations because they offer liability protection from your personal assets, but they are like sole proprietorships in the way that earnings are taxed.

What Are the Benefits?

One of the key benefits of choosing an S corporation over a standard corporation is the way the business earnings are taxed. With a standard corporation, the earnings of the business are taxed through the business. Standard corporations are considered entities, and therefore they must pay taxes. In addition, anyone that earns money from the business must also pay taxes on the income they earn. This is why people often say that corporations are double-taxed.

S corporations handle this in a different way. Even though an S corporation is considered a separate entity, the business itself does not pay taxes. Instead, the earnings are spread between the shareholders, and they will each pay taxes individually on the money they earn. Shareholders are allowed to get normal paychecks, with taxes withheld from them. This makes it easy for shareholders to prepare for tax returns each year.

The other major benefit converting from a proprietorship to an S corporation offers to you is liability protection. When you run a sole proprietorship, your creditors can come after your personal assets if the business owes them money, and you have no way to stop this. Through an S corporation, this cannot happen. Your personal assets are protected from this, which means that creditors can only come after assets owned by the business.

Another benefit of an S corporation is that it can continue operating if shareholders leave the business. With a partnership, the business legally ends when a partner leaves, which requires the remaining partners to establish a new company.

Are There Other Options?

The only other option you could choose is a limited liability company (LLC). This option is very similar to an S corporation, yet there are differences. Both options offer liability protection and advantages with taxes; however, there are more rules with S corporations. Another difference is that it is cheaper to start an LLC than an S corporation.

Some people believe that S corporations provide more liability protection than LLCs and this is one of the big reasons they select them over other available options in business structures. Before you choose any option, it's important to understand all the pros and cons of all types of business structures.

As you consider your options, you may want to discuss the decision with a corporate lawyer. Corporate lawyers can give you more insight about your options in business structures, and they may be able to offer better advice for your individual situation.