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¶ … corporation is a regular corporation that opts to tax its profits at the personal income tax level. An S corporation must prepare and file an income tax return, but itself pays no tax (if it complies with all of the technical and complex rules of the Federal law). Each shareholder pays taxes on his/her share of S. corporate income on his or her individual tax return. Owner-employees of an S corporation are treated like partners for purposes of employment and benefits.
is set up in the same manner as a regular corporation and then files for IRS approval (and sometimes state approval) after hurdling through several IRS regulations.
S Corporation allows the small business owner to avoid dealing with the double taxation of profits and dividends. Also, shareholders may be able to offset business losses by the corporation against their personal income, subject to certain restrictions.
Advantages of the S Corporation
Creation of the corporate shield that, in the absence of personal guarantees, limits the liability of stockholders to their capital investment in the corporation and the usefulness for estate planning purposes of the corporate form of business organization are frequently cited advantages of forming an S corporation. Other advantages include:
The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.
Fractional ownership shares are easily accommodated in the initial offering of stock.
The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.
The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.
With only a few exceptions,...
Non-voting stock is not considered a "separate class" for this purpose, however.
A shareholder's basis in the corporation does not include any of the corporation's debt, even if the shareholder has personally guaranteed it. This has the effect of limiting the amount of losses that can be passed through. It is a disadvantage compared to partnerships and limited liability companies, and is one of the main reasons that those forms are usually used for real estate ventures and other…
References
Gessaman, Paul. "Setting up Your Own Business the S Corporation, NF96-255 (Revised
October 1996)." NebFacts. 1996. NebFacts. 4 May 2005
<http://ianrpubs.unl.edu/consumered/nf255.htm>.
'S Corporations." FreeAdvice. 1995. FreeAdvice. 4 May 2005
< http://business-law.freeadvice.com/corporations_s.htm>.
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