It may be a good decision for small business owners to choose to be treated as an S corporation for Federal tax purposes. This allows income to flow through the corporation without being taxed until it is claimed as income by the shareholders. This avoids double taxation of corporate income. This may be the right decision for your new company, but you should discuss this thoroughly with your accountant before you decide. The following are the limitations on S corporations that you should consider:

1. No more than 100 shareholders.

2. Only one class of stock.

3. Limits on deductibility of debt.

4. If S-Corp has a home office, the tax deduction is only a 2% miscellaneous itemized deduction on Schedule C, because it is treated for tax purposes as an employee business expense. In a partnership or LLC, a home office is a 100% deductible on Schedule E.

5. The S-Corp cannot reduce wages to avoid employment taxes, because it would directly conflict with its responsibility for its employee's retirement benefits. Retirement plan contributions are based on a percentage of wages, not total S-Corp income.

6. All distributions by an S Corp must be made pro rata based upon stock ownership. An LLC can make disproportionate to members distributions as set forth in the operating agreement.

7. An S-Corp is required to file an extra tax return and more payroll forms, and this costs the company more money. Conversely, the LLC can file its deductions on the Schedule C and designate itself as a "disregarded entity."(Note: a "disregarded entity" is an IRS term for a company that is not an S or a C corporation.

8. If an S-Corp has high value assets and it goes out of business, the S-Corp's assets are sold at FMV to the shareholders, thereby causing shareholders to incur large capital gains. When an LLC closes, the assets are distributed to its members at basis, usually the cost of the assets.

Jo Ann Joy

Jo Ann Joy is the CEO and owner of Indigo Business Solutions. She has a law degree, an MBA, and a degree in Economics. Her legal background includes commercial, corporate, bankruptcy and real estate law. She has expertise in accounting, financial planning, mortgages, marketing, product development, and business strategies.

Jo Ann ran a successful business for 10 years, and she has written and given presentations on many different legal and business subjects. Jo Ann started Indigo Business Solutions, and she strives to help small businesses make decisive improvements in their start-up, direction, growth, and performance. Jo Ann is passionate about helping businesses succeed.

Indigo Business Solutions is a ?one stop shop? for small businesses. We differ from other business consulting firms, because we offer comprehensive legal and business counseling. We work with our clients to develop strategies that create value and competitive advantage. Jo Ann is not a traditional attorney. Rather, she is a strategic business attorney who works closely with clients to create and implement strategies that will greatly improve their performance and success.

Jo Ann will her talents, expertise, and education to inspire enterprising and imaginative people to make their goals a reality and enjoy professional and personal growth. She promises to consistently deliver quality and reliable service to earn your trust and create lasting relationships. She promises that she will make a positive difference in your business.

If you are not getting what you want from your business or if you want to reach higher goals, Indigo Business Solutions delivers the strategic planning that will provide you with the right tools and methods to grow and gain market share. Please look at our website and found out how we can help you expand and achieve your goals.

We offer straight talk, sound advice, and practical solutions. Your small business deserves to be a success, and