About S Corporations

Gabi · Joined: 06 May 2004 Posts: 2

What it is S Corporation? If you are well grounded in the matter of the business you probably know, but if you are not, or you have just gone into this business, then you may not be familiar with this term. Well, if you want to know something more about it, then this article is the right resource of information for you. So, let's start…
"S Corporation" means nothing more than a regular corporation which elects to be taxed under subchapter S of the Internal Revenue Code. To talk about s corporations or "S Corporation forms", as if there were a separate legal entity of that name, is thus improper, since State corporation laws make no distinction between the two. Four principal laws concern you when you form an entity:
1. State laws concerning formation of that entity
2. State and federal laws concerning the issuance of its stock or membership interests
3. Federal tax law and
4. State tax law.
As you have probably understood, S-corporations don't pay company tax. You only pay tax on your salary. Great, but why are there still C-corporations? As it was said above, the reason is that because the number of shareholders in an S-corporation is limited. In fact, the exact number depends on your state/country, but don't expect it to be above 50. It is probably closer to 30.
How to start such corporation? To be classified as an S Corporation, a corporation must make a timely filing of Form 2553 with the IRS. In order for this election to take effect in the current calendar year, the election must be made by March 15, if the corporation is a calendar year taxpayer. A corporation can decide later to elect S Corporation status, but this election would not take effect until the following calendar year.
Now, let's see a few advantages and disadvantages of this type of corporation. Choosing the S Corporation you will avoid possible double taxation. Also, the shareholders are not personally responsible for the debts and liabilities of the corporation. Broadly stated, the effect of filing the election is this: the net income (after business expenses and other permissible deductions) is required to be included in the individual returns of the stockholders of the corporation, in the same percentages as their percentages of ownership of the corporation. There is no federal income tax imposed upon the corporation with respect to any part of its net earnings. Instead, the federal income tax is imposed on the taxable income of the stockholders. With a C corporation (that is, a corporation which does not file form 2553), the net income is subject to tax at the corporate level and, if it is later distributed to the stockholders as dividends, it is taxed again at the individual stockholder level. This is not as harsh as it seems. The key term here is "net income". In the typical small corporation, there is no net income after you consider the compensation allowed to be paid to the stockholders for their services, and consequently nothing to tax at the corporate level. The stockholders declare their compensation in their individual returns and pay taxes on that compensation. The risk of a double tax arises only if the corporation didn't or can't distribute all of its net income (before compensation to the owners) to the owners. This fail-safe provision is the principal advantage to S corporations. And most of the other advantages of any type of corporation apply to an S Corporation.
Now, it is time for the disadvantages of the S Corporation.
In order to qualify for S Corporation status, the corporation can have only one class of stock, which is really inconvenient, because you may want to have more than one class of stock. Another thing is that the shareholders must number fewer than 75. Also the shareholders must be individuals, estates or certain qualified trusts and all must consent in writing to the S Corporation election. Keep in mind that Shareholders cannot be non-resident aliens. Also, you have to know is that more corporate formalities (annual paperwork) and more state and federal rules and regulations are needed than with sole proprietorships and partnerships.
You probably have heard of the C Corporation, which was already mentioned a few times above in the article. Here you will find out why you should prefer the s corporation.
First of all, the c- Corporation is a corporation that is taxed at the corporate level rather than the shareholder level.
When entrepreneurs consider starting a business, or when existing small business owners consider changing their business structure, the most common option they evaluate is the corporation, also known as the C Corporation. Another option considered is the S corporation. An S corporation is a standard corporation that has elected a special tax status with the Internal Revenue Service (IRS). It gets its name because it is defined in subchapter S of the Internal Revenue Code. Both of these corporation types are popular options for today’s small business owners.
There are a number of similarities between C and S corporations, but there are also distinct differences, but this article is not connected with this topic.
And so, we have finally reached the end of the article. It has probably helped you a little to fill your gapes in the knowledge about the s corporation. If it so, then the article has reached its object. And all you have to do now is to follow you ideas and choose the best type of corporation for you!
Good luck!