Summary: S-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S Corporation are not subject to double taxation. An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation's shareholders include their share of the corporation's income or loss. S-Corporation vs. C-Corporation Advantages: Like C-Corporations, 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 corporations. Unlike C-Corporations, for Federal income tax purposes taxation of S corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level. Certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation. Disadvantages: Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake). Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions. Unlike a C-Corporation, ownership of an S-Corporation is significantly restricted (read next). Who Can Form an S-Corporation? S-Corporations are more suitable for small and family businesses, and for those who start their business with small investment. Also, some existing businesses qualify for S-Corporation status. To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called " Election of S-Corporation Status") certain conditions must be met: S-Corporation cannot have more than 100 shareholders. All shareholders must be either U.S. citizens or residents, estates, or certain trusts. Can only have one class of stock. Preferred stock is not allowed. Profits and losses must be accorded to owners in proportion with their ownership stake. Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose. Shareholders cannot deduct losses in excess of their investment. The corporation cannot deduct fringe benefits given to employees who own more than 2% of the corporation. Filing With IRS And The State S-Corporation Election is filed with the IRS (Election by a Small Business Corporation, Form 2553), and that election is recognized by all states. with the exception of New York, New Jersey and Arkansas, which require additional state filing. S-Corporation Advantages Forming S-Corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources. S-Corporation shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes. When you sell your S-Corporation, your taxable gain on the sale of the business can be less than it would have been had you operated the business as a regular corporation. Taxation of S-Corporations https://www.myusacorporation.eu/s-corp.html
