In spite of the growth and popularity of limited liability companies
, S corporations still remain popular as an option for conducting business. In fact, Internal Revenue Service records indicate that the S corporation is the most popular entity under which to conduct business. In 2009 there were an estimated 2.5 million C corporation income tax returns filed; a figure that has remained relatively stable over the past five years. During that very same five year period, S corporation tax return filings increased from 3.5 million to approximately 4.5 million.
While S corporations must deal with a number of statutory restrictions such as the number of shareholders and types of stock allowed, they also can provide a number of advantages. They follow the general corporate structure with regard to having stockholders, boards of directors and officers, but do not require operating agreements. They can also offer more certainty for shareholders with regard to employment and capital related distributions.
This advantage of the segregation of compensation and capital has been touted as a possible advantage for S corporations in determining how best to structure affairs in the face of the new Medicare taxes passed by Congress this year as part of the new health care legislation. The new Medicare taxes to be imposed on high income earners may be avoided by S corporation shareholder/employees who can effectively limit their compensation amounts by taking part of their compensation as distributions of profit. Other entities will likely have considerable more trouble utilizing this tactic. A similar strategy may assist in avoiding some or all of the 3.8% Medicare tax on investment income as well.
This scenario may not materialize to the extent that it could however. Congress is currently considering subjecting the K-1 income of certain S corporations to self-employment tax; a 15.3% FICA tax currently assessed against partnerships and sole proprietors. This legislation - known as the extenders legislation or HR 4213 - would effectively eliminate any advantage that the S corporation has over partnerships and would saddle S corporations with a significant marginal burden - particularly at a time when small business is being looked at as a generator of jobs growth.
Such a change might not detract much from the attractiveness of the S corporation structure. It would eliminate one key advantage it has over the partnership structure, but then the two forms would be on a more equal footing and many taxpayers may still prefer their pass-through entity to operate in the more familiar corporate structure.