Overview[ edit ] S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Congress, acting on the Department of Treasury's suggestion ofcreated this chapter in as part of a larger package of miscellaneous tax items.
In many ways, it is very much like a traditional corporation, but with certain partnership-like traits that can benefit certain types of business organizations.
One of the primary advantage of being treated as a chapter S Corporation is that of pass-through taxation. Pass-through taxation exists when the shareholders are taxed at the individual level, like a partnership, rather than first at the company level, then again at the individual level.
This gives the shareholders the best of both worlds in many instances—the pass-through taxation benefits of a simple partnership, and the limited liability and asset protection that a corporation affords.
This is known as the double-taxation jeopardy and is one of the main reasons for the existence of the S Corporation. The S Corporation, on the other hand, is not taxed at the company level.
One thing to bear in mind is that this taxation occurs whether or not there is an actual distribution to the shareholders. This means that the income is only taxed once, as a distribution to the share holders. This pass-through taxation method can be both a boon and a nuisance.
If John, as the majority owner, decides not to distribute the net income profit, John, Jack and Jacob will still be liable for taxes on the earnings as if a distribution was made in that manner, even though none of the three received an actual cash distribution.
In the traditional corporation, although there is the initial corporate tax, there is no dividend tax at the individual shareholder level unless an actual distribution is made. Another limitation to the S Corporation is the fact that the number of shareholders is limited toand if there is only one shareholder, there is the ever-present danger that the IRS disregards the chapter S status and treats the company as a standard corporation for tax purposes.
This is more likely the case when there is any sort of deviation from the corporate formalities.
S Corporation Formalities The forming of an organization as an S corporation also means that, just like with a traditional corporation, the corporate formalities must be observed.
The Formalities can be summarized as follows: Corporate Funds must be maintained separate and apart from Personal Funds.
There must be Annual Meetings of the Board of Directors. There must exist Corporate Minutes and an officer assigned to take and care for the minutes.
All Corporate engagements, contracts, and strategic acquisitions must be in Written Form. Much more in-depth discussion and descriptions of the corporate formalities can be found in our section containing a Corporate Formalities Checklist. Moreover, it bears mentioning that the adherence to the corporate formalities is a must for the successful operation of any corporation.
These formalities serve to preserve the limited liability and tax benefits afforded by the corporate status. Filing for Subchapter S Treatment The steps necessary to achieve S corporation status are not terribly complicated, but need strict attention paid to them to ensure that the status withstands scrutiny and the benefits of the status are enjoyed.
To start, the shareholder s of an existing corporation, or the owner of a new corporation, must execute IRS Formalong with any local documentation if the state of residence for the corporation recognizes S corporations some states treat all corporations the same, and yet others allow for the S designation and follow similar taxation strategies.
The execution and filing of this election must occur before the 16th day of the third month following the close of the corporation tax year in order for the corporation to be considered for S status during the current tax year. The corporation must meet the S Corporation qualifications during the aforementioned 2.
Relinquishing S Election Status S Corporation status can be relinquished voluntarily via the filing of the appropriate statement of termination. This type of revocation of status may only be made with the approval and consent of the majority shareholders.
The complete process, and all necessary supporting information requirements, can be found in the IRS Regulations section 1. Income Tax Return for an S Corporation. Involuntary revocation or termination of status can occur any time the Regulatory agencies, such as the IRS or the State Franchise Tax Board, proclaim a violation of the eligibility requirements, or to much greater detriment, any failure to observe the corporate formalities that brings to question the separate legal entity status of the corporation.
Who Should Organize as an S Corporation? Partnerships, groups of investors, or even existing corporate shareholders looking for the dual benefits of enjoying limited liability and pass-through taxation should seriously consider the S Corporation status, provided that the rules for eligibility can be met and sustained.
There are many benefits to be garnered from this form of organization, though this is a decision that should be made with the assistance of an informed expert in subchapter S Corporations. Unlike C corporation dividends which are taxed at the federal rate of However, the c corporation dividend is subject to the double-taxation mentioned above.
The income is first taxed at the corporate level before it is distributed as a dividend and then taxed as income when issued to the individual shareholders. If Jack as the majority owner decides not to distribute the net income profit, both Jack and Tom will still be liable for taxes on the earnings as if a distribution was made in that manner, even though neither received any cash distribution.
Business Goals of an S Corporation Having S corporation status provides for a few substantial benefits for a corporation. First and foremost, of course, is the goal of achieving limited liability, or mitigating the impact of personal law suits, or other forms of debt incurred by individual shareholders, against shareholders, and protecting against them impacting the corporation as a whole, or the rest of the shareholders as individuals.Apr 23, · The sale of a business usually is not a sale of one asset.
Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.
May 03, · In order to become an S corporation, the corporation must submit Form Election by a Small Business Corporation (PDF) signed by all the shareholders.
See the Instructions for Form (PDF) for all required information and to determine where to file the form. This is a Corporation formed in the State of California on May 21, Business started by Leslie Smith and Kevin J Hunt.
60% of capital stock is owned by Leslie Smith. 40% of .
An S corporation is a special structure of business ownership by which the business is able to avoid double taxation because it is not required to pay corporate income tax on the profits of the company. For example, the participants might vote or the question may be referred to the corporation’s accountant, attorney or a special committee for a recommendation.
8. Record the time and terms of. It's kind of like the lite version of a c corporation (c corp). An s corp offers investment opportunities, perpetual existence, and that coveted protection of limited liability.