S corporations are a unique business form. Named after Subchapter S of Chapter 1 of the Internal Revenue Code, these corporations mix the benefits of a partnership with the benefits of being a corporation to create a flexible business.
For example, there usually is no federal income tax to be paid by the S corporation as an entity. S corporations are pass through entities, which means the owners are taxed on their share of the corporation’s earnings.
This is what makes the S corporation similar to the partnership business form. The S corporation is similar to the C corporation because shareholders enjoy a limited liability that is bound by their investment in the firm. The shares of the S corporation are easily transferable like a C corporation, and if a shareholder dies or withdraws the business will continue.
S corporations can be a great form to choose for a business that is just starting and is expecting large paper losses, such as depreciation, and sizable expenses. When it comes time to pay taxes, owners are able to uses these losses to offset personal income that they have earned.
When becoming an S corporation there are just a few more regulations and restrictions to follow than with a C corporation. If a business is able to abide within these boundaries, this business form will prove to be a worthwhile choice.
Deductions– Qualified retirement plans are deductible whether the employee is or is not a shareholder. Fringe benefits such as life insurance are deductible for employees owning less than 2% of the corporation.
Limited Liability– Shareholders have limited liability. Liability is limited to the amount of the investment from the shareholder.
Personal Taxes-Owners are able to use corporate expenses and losses to reduce personal income tax.
Transferrable– Shares of ownership in the S corporation are very easily transferred to others.
Voting– Stockholders are able to vote to change the company into an S corporation, and they are also able to vote to change the business back to a regular corporation. This can be helpful when the allowance for tax losses and expenses are used up.
Shareholder Limit– For an S corporation, there is a limit to the number of shareholders. Usually this limit is 100 shareholders. Other business forms, such as the C corporation, are able to have an unlimited number of shareholders.
Shareholder Residency-Nonresident aliens are not allowed to be shareholders in an S corporation. This is because nonresident aliens do not pay income tax, and neither does the S corporation. Any profits distributed to the nonresident alien would not be taxed at any level.
Formation– To become an S corporation all the shareholders must vote in favor of changing the business form to this.
Stock– An S corporation is only allowed to have one class of stock available to shareholders.
Standards– A company has to meet several standards before becoming an S corporation and to stay an S corporation. If the company ever has more than 100 shareholders, has an ineligible shareholder, or receives a majority vote to revoke status, the company will cease to be an S corporation.
The next business form examined is the Limited Liability Company (LLC).
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