The S Corp Edge: It's Not Just Taxes

It's more than just the tax advantages that boosts returns for investors in banks classified as S corporations—they appear to be fundamentally more profitable than their C corp counterparts.

The return on assets at the median S corp has consistently outdistanced the median for C corps by a wide margin over the past six years, even after adjusting earnings for S corps as though they paid corporate taxes, according to data from SNL Financial. In 2011, the median was 0.89 percent for S corps and 0.58 percent for C corps. (Unadjusted, the median for the S corps was 1.13 percent.)

The median return on equity for the S corps also consistently beat the median for C corps by a large gap, while median leverage, as measured by equity to assets ratios, was roughly on par between the two groups. (Institutions considered here had less than $500 million of assets at yearend and did not change their tax status between 2006 and 2011.)

S corps are entities with fewer than 100 shareholders that elect to pass their tax liabilities through to their owners, avoiding the double taxation of income that applies to ordinary C corps.

There is no reason that S corp status should translate into better fundamental performance, but perhaps smaller ownership groups tend to demand more from executives. Or perhaps executives at S corps are more likely to have big ownership stakes themselves.