The major tax benefit to operating your business as an S corporation is the possible savings on self-employment taxes. This article examines the tax savings to see if this form of business is right for you as a single-owner or husband-and-wife-owned business.

You may not need an S corporation if liability protection is your only concern. You can achieve both liability protection and proprietorship status with a single-member limited liability company (LLC). In community property states, a husband and wife can elect single-member LLC status on their federal tax return and thus file a proprietorship return in either the husband’s or the wife’s name.1

This article focuses on the self-employment tax savings of the S corporation compared to those of the proprietorship. It also discusses the tax and record-keeping costs of these two forms of business.

You want to read this article if

you are considering an S corporation as your form of business, or

you are wondering whether your current S corporation is the best form of business for you.

Taking Cash from the S Corporation

As the business owner, you take cash from your S corporation in four ways:

W-2 income

Rent paid by the S corporation to you for its use of assets that you own and rent to the S corporation

Corporate reimbursements to you for your employee expenses

Distributions from the earnings and profits of the S corporation

The S corporation is a pass-through entity. This means that the income and losses pass through to the shareholders and are taxed on the shareholders’ returns.

For tax purposes, think of your S corporation as a funnel into which you put ... Log in to view full article.