Incorp. - S Corp - LLC

 

Double taxation is a term you will often hear as a major disadvantage of a C Corp. In some circumstances, C Corp profits will be subject to "double taxation".  For example, if a C Corp generates profits, it will have to pay taxes on those profits (1^st time taxed). Next, because of the profits, a C Corp may issue dividends (distribution to Shareholders/Owners) as a return on their investment. Once distributed to the Shareholder/Owner, the Shareholder/Owner will also have to pay tax on the distribution when they report the distribution on their personal income tax return (2^nd time taxed), thus profits have been doubled taxed. Also, if the owner(s) of the Corporation are also paid salaries from the C Corp�s profits, they will be taxed on their wages from the C Corp on their personal return (2^nd time taxed). The C Corp has to pay taxes on the profits and the Shareholder/Owner has to pay taxes on the distribution/wages of profits they received from the C Corp.

 

Also, C Corps cannot pass through losses to Shareholders/Owners like a Sole Proprietorship or a Partnership. Thus the Shareholders/Owners cannot reduce their personal taxes by losses incurred by the C Corp.

 

Lastly, C Corp is the most complicated Business Structure to set up. C Corps must follow all of the corporate formalities including filing various documents with the State, the notice and holding of board meetings and the maintenance of records. Numerous regulations and requirements must be upheld by the C Corp to remain in good standing with the applicable State government agency, failure to do so will result in the suspension of the C Corp�s ability to do business in the State. Banks may close the C Corp�s bank account(s) and lenders can call for immediate payment on their loans if a C Corp is suspended from doing business in the State.

 

When considering a C Corp, it is imperative that the C Corp is set up properly with the State. Please contact us for free consultation regarding the incorporation of your business.

An S Corp is a C Corp that made a timely election with the IRS to become a S Corp. Like a C Corp, an S Corp is generally a Corporation under the law of the State in which the entity is organized. Please see below for Advantages and Disadvantages.

 

 

S Corporations are separate legal entities from their Shareholders and, under State laws, generally provide their Shareholders with the same liability protection afforded to the Shareholders of C Corp.

 

 

Federal:  S Corp resembles a Partnership, the net income or losses of an S Corp flow through to Shareholders based on the Shareholders applicable interest in the S Corp. The Shareholder�s report their share of income or losses of the S Corp on their personal income tax returns. The S Corp does not pay taxes on income or losses.

 

State: S Corp are exempt from State income taxes.

 

To be recognized as a S Corp for tax purposes, the C Corp must meet the following requirements:

If a corporation meets the foregoing requirements and wishes to be taxed under Subchapter S, its Shareholders may file Form 2553: "Election by a Small Business Corporation" with the Internal Revenue Service (IRS). The Form 2553 must be signed by all of the Corporation's Shareholders. If a Shareholder resides in a community property state, the shareholder's spouse generally must also sign the 2553.

The S corporation election must typically be made by the fifteenth day of the third month of the tax year for which the election is intended to be effective, or at any time during the year immediately preceding the tax year. Congress has directed the IRS to show leniency with regard to late S elections

 

 

Since a S Corp is a separate legal entity, it is responsible for its own liabilities, debts and legal claims. Usually Shareholders, Directors or Officers are not liable for the liabilities, debts or legal claims of the S Corp. In other words, their personal assets are protected.

 

As a separate legal entity, a S Corp can operate indefinitely. The death of a Shareholder does not affect the legal status of a S Corp.

 

Becoming a S Corp can also reduce or eliminate self employment taxes for business owners who own their own business. Distribution of income, generated by the S Corp to business owners, can be classified as dividends. Dividends are not subject to self employment taxes. Distributions, under a Sole Proprietorship, would be subject to self employment taxes.

 

Setting up a S Corp is complicated and requires familiarity with State regulations. Furthermore, numerous regulations and requirements must be upheld by the S Corp to remain in good standing with the applicable State government agency, failure to do so will result in the suspension of the S Corp�s ability to do business in the State,

 

Please contact us for free consultation regarding a S Corp status.