Considering a Structure Change? S Corp Advantages and Disadvantages

The structure your business currently operates under isn’t the one you’re confined to. In fact, countless business owners switch structures each year. Why make the transition? For one, each structure has different tax advantages. In addition, the avenues available to raise capital also differ by structure.

While there are numerous structures you can choose from, S Corps should be at the top of the contender list. S Corporations are pass-through entities, passing all taxable income or loss down onto the individual return. In this article, we’ll cover the advantages and disadvantages of the S Corp structure, helping you decide if this is the right route for your business.

S Corporation Advantages

The first set of advantages that S Corps offers comes in the form of payroll tax savings. Sole Proprietorships and Single-Member LLCs that report and pay taxes on Schedule C must pay self-employment taxes on net profit (revenue – expenses). This can add an additional 15.3% tax burden onto your bill. In 2024, the self-employed maximum contribution limit for Social Security tax is $168,600 at 12.4%, and Medicare is taxed at 2.9% with no income cap. In addition, all profits will be subject to ordinary income taxes at your marginal rate.

S Corporations have the ability to bypass self-employment taxes, with net profit only being subject to ordinary income taxes. However, the IRS does require that S Corporation owners pay themselves “reasonable compensation” through payroll. Although there is no defined guideline on what is considered reasonable, it should be the market average for a similar position.

Additionally, S Corporation owners who are on payroll can utilize pre-tax retirement contributions to further lower personal taxable income and take a deduction for any company match.

Moreover, S Corporations can elect to pay state taxes at the entity level in many states. This can result in lower state taxes paid compared to paying amounts due on your individual return. New York does offer a pass-through entity tax.

S Corporation Disadvantages

There are a few S Corporation disadvantages to be aware of as well. The first disadvantage comes in the form of state and local taxes. Even though profits from an S Corporation are generally taxed at lower rates compared to other structures, this entity classification can be subject to stringent state and local taxes. For example, New York City imposes an 8.85% business tax on S Corporations on top of regular federal and state taxes.

Furthermore, an S Corporation structure might impact your ability to borrow from creditors. Unless you pay yourself a high salary, you might not be eligible for certain loans. If you plan on obtaining a new mortgage or large loan, you might want to hold off on switching over to an S Corporation structure.

Making the Choice

These advantages and disadvantages are only a few of the characteristics of an S Corporation structure. When it comes to making a decision, you need to evaluate if an S Corporation structure meets the needs of your business now and in the future. For personalized advice, contact one of our team members at Kislay Shah CPA PC today to schedule your free consultation at or 646-328-1326