Forming an S corporation

Since the tax advantages of forming an S corporation can be inferior to an LLC or partnership, why would anyone be forming an S corporation? Also, when forming an S corporation, the subchapter S corporation owner loses the separate taxability which is the main benefit of forming a corporation.

So why would anyone be forming an S corporation?

One reason why people form an S corporation is that there may be times during the life of the corporation where pass through taxation makes sense, for tax or other reasons.

One example why forming an S corporation makes sense is when the incorporators expect start up losses. In a regular corporation, these losses are normally locked into the business. These start up losses can be used only to offset future corporate profits. But if a subchapter S corporation tax election is incorporated, the losses may qualify to be used to offset other individual income earned by the owners from business activity outside the corporation. For example, salaried income they receive from another business.

As another example, if corporate shareholders who do not work in the business decide it is time for them to receive their share of corporate profits, but the corporation doesn’t want to pay out non deductible dividends, forming an S corporation can allow automatically allocation of profits to shareholders of the subchapter S corporation. The subchapter S corporation itself pays no income tax on the passed through allocated profits.

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