advantages to s corporations



The advantages to s corporations, if there are any in your case, relate solely to taxation. An S corporation is a regular corporation (otherwise taxable under subchapter C of the Internal Revenue Code, and sometimes referred to as a C corporation), or a limited liability company which has elected to be taxed like a corporation, which files form 2553 with the Internal Revenue Service. It is not necessary for the participants to file this election (or even to decide to do so) before they form the entity. If form 2553 is filed, nothing changes except the tax status of the entity and the participants.

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. Contact us for prompt,professional service concerning this or other questions related to incorporation, forming an LLC, or registering a trademark.


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