Starting a Business with Partners? Why an S Corporation Might Be a Smart Move?

If you’re teaming up with others to launch a new business, picking the right type of legal structure is one of the first big decisions you’ll face. An S corporation might be the best choice for your new venture. Here’s why.

Why a S Corporation Might be a Smart Move

One of the biggest perks of setting up an S corporation instead of a partnership is limited liability — meaning, you generally won’t be personally on the hook for business debts. But to make sure that protection holds up, you’ll need to:

• Put enough money into the company to keep it running smoothly

• Keep your business and personal finances separate

• Follow your state’s rules (things like filing incorporation papers, writing up bylaws, choosing a board of directors, and holding your official startup meetings)

Handling Losses

A lot of startups don’t turn a profit right away. If that’s your case, an S corporation could be more helpful tax-wise than a C corporation. With an S corp., you can deduct your share of the business’s losses on your personal tax return—if you have enough basis (basically, your investment in the company plus any loans you’ve made to it). If your losses go over your basis, no worries—you can carry them forward and use them in future years.

Profits and Taxes

Once the business is making money, those profits will “pass through” the S corporation and get reported on your personal tax return. That’s the case whether or not the company actually pays the money out to you.

The good news? This income isn’t hit with self-employment tax—though any wages you pay yourself will still be subject to Social Security and Medicare taxes.

Even better, you might qualify for the 20% Qualified Business Income (QBI) deduction, which can lower your tax bill even more. Just keep in mind there are some rules and income limits.

Note: The QBI deduction is set to expire after 2025 unless extended by Congress. There's talk of making it permanent, but nothing’s official yet.

Offering Perks Like Health Insurance?

If you want to give yourself or other owners benefits like health or life insurance, here’s how it works: if you own more than 2% of the company, the business can deduct the cost, but you’ll have to include it as income on your personal return.

Protecting the "S" Status

It’s important to be careful about who owns shares in the company. Giving or selling stock to the wrong type of owner — like another business, a partnership, or a non-U.S. resident — can cancel your S corp. status and turn you into a regular C corporation (with less favorable tax treatment).

To avoid, it’s smart to have all shareholders sign an agreement promising not to transfer stock to anyone who could cause issues. Also, remember — S corps are limited to 100 shareholders max.

Final Steps

Before you lock in your business structure, it’s worth sitting down with a pro. We can walk you through the details, answer your questions, and help you set up your business the right way.