A Taxing Consideration: Choosing A Business Structure

By: Donna Ray Berkelhammer. This was posted Thursday, October 29th, 2009

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The final entity we will discuss is the S-corporation.

S corporations combine the most beneficial aspects of partnerships and corporations. Like standard C corporations, a properly formed, properly capitalized and properly maintained S Corporation should protect the owners from liability other than their capital contribution. S corporations, however, avoid the double-taxation problems of C corporations.

In making an “S” election with the IRS, the corporation elects to pass corporate income, losses, deductions and credits through to the shareholders (in proportion to their percentage of ownership) for federal tax purposes. Each shareholder must then report the flow-through of income and losses his or her personal tax return and pay taxes at his or her standard income tax rate.

S corporations are often a good choice for start-ups because of the limited liability, flow-through tax treatment, and possible payroll tax advantages they offer. Not everyone, however, can be the owner of an S-corp. There be no more than 75 shareholders, other corporations cannot serve as shareholders, foreign citizens cannot be shareholders, and only one class of stock may be issued.

For taxation purposes, S corporations must file IRS Form 1120S U.S. Income Tax Return for an S Corporation to report all income, gains, losses and deductions for the company. The company may also need to make estimated payments for (a) the tax on built-in gains, (b) the excess net passive income tax and (c) the investment credit recapture tax. Additionally, like all businesses, the S corporation must pay employment taxes, including Social Security, Medicare and unemployment.

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