Three Negatives of an S Corporation

S corporations are said to face several challenges. Firstly, there is the problem of accounting. An S corporation is complicated and needs a lot of accounting. For instance, an S Corp is expected to prepare balance sheet statements of the financial performance together with the corporation’s yearly returns. This additional accounting shortcoming implies the owners have to incur extra costs of hiring an accountant to perform the additional accounting. Secondly, there are issues of taxation on returns of an S Corp. Tax returns increase preparation expenses. Generally, S corporation tax income returns are very expensive to make. This additional expense consumes the profits of a corporation. A corporation’s profit is somewhat complicated (Nelson, 2011).

Moreover, an S corporation’s returns demand extra pages for special statements. Thirdly, there are payroll risks and expenditures to the owners. The process of coming up with an official payroll check and profits is very expensive. An S corporation decision would spark off-payroll if the shareholders worked before for the Corp. Basically, if the employees in a sole proprietorship or partnership are shareholders, the corporation is not required to prepare a payroll (Nelson, 2011). However, if the proprietorship or partnership opts for an S corporation, the working shareholders must be paid. In short, the owners are treated as employees; hence an S corporation has to make a payroll, which is time-consuming (Nelson, 2011).

The S Corporations also have some advantages despite the above drawbacks. The above drawbacks only apply in particular circumstances. But when a corporation is elevated to another status, they cease to apply. The following are some positives of S Corps. Firstly, there is unlimited liability protection. Basically, Shareholders are not answerable for typically the corporation’s liabilities or amounts overdue. Secondly, S corporations enjoy the advantage of payroll tax savings when compared to other businesses. This comes as a result of the shareholders’ remuneration consuming the entire returns of the corporation. This enables the shareholders to save on payroll taxes (Nelson, 2011).

The third advantage that S corporation has over other corporations is that they are able to mobilize financial resources without any difficulty. Extra financial capital can be obtained from the sale of the stock of the corporation. This enables the corporation to raise more capital without any problems. This allows the corporation to grow faster. The expression piercing the corporate veil refers to the decision by a court to hold the company owners in person to be legally responsible for the liabilities and debts of a corporation (Murray, 2011). However, there are circumstances under which piercing the corporate veil can happen. Firstly, in the event case of fraudulent undertakings, which means a corporation is said to be involved in a racket to con the public. Secondly, when the owners of a corporation deliberately decide to engage in activities that meet the interests of the owners at the expense of the larger society.

Three changes that Sarbanes Oxley made to the law can be identified. The Act alters how publicly traded corporations are audited and reverses the financial reporting mechanism. This law approves stern terms to discourage and penalize commercial and accounting fraud and dishonesty, ensures fair dealing for the offenders, and safeguards the welfare of employees and owners of corporations. This law enhances openness in submitting balance sheets, free audits, and accounting for public enterprises. Lastly, the act enhances the corporate social responsibility of the corporations and increased accountability.

References

Murray, J., (2011). Piercing the Corporate Veil. About.com Guide. Web

Nelson, S. L., (2011). S Corporations Kits and More. SCorporationsExplained.com. Web.