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The ins and outs of a sub-S corporation

New business owners in Ohio, who are deciding which entity to register as, may want to consider a sub-S corporation. It is a popular choice for smaller companies because of its liability protection and tax benefits.

According to the IRS, certain requirements must be met in order to be considered for an S corporation. The business must:

  • Have only one stock class
  • Work as a domestic company
  • Have 100 or fewer shareholders 
  • Have shareholders that are allowable, which include individuals, estates and certain trusts
  • Be an eligible corporation

Sub-S corporations are able to take advantage of certain tax benefits because their losses, income, credits and deductions are passed to the shareholders, which means that federal taxes only have to be paid at the individual level. Compare this to a C corporation, in which both the shareholders and the company are responsible for federal taxes, which is known as double taxation. 

According to Entrepreneur, the members of an S corporation have a certain level of liability protection in that their personal assets are protected against litigation or business bankruptcy. Depending on the type of business, this type of corporation may also be able to use the cash method in their accounting process, which is easier than the accrual method.

Although there are a number of advantages to an S corporation, there are also some disadvantages. In order to meet the corporate requirements, it can take a lot of recordkeeping, shareholder meetings and money for lawyers and accountants. Raising money for capital can sometimes be hampered, and not all states recognize sub-S status. 

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