Corporation Ethical Issues With S

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Ethical Issues with S corporations

S corporations are the type of businesses or corporations that choose to have the individual shareholders bear the income, the deductions, losses as well as credit for the purpose of the taxation process by the federal authorities. In such a corporation, the shareholders are responsible for reporting the flow-through of the losses as well as the income during the filing of their personal tax returns and hence their taxes are assessed at the individual income tax rates. This method of taxation allows the corporation to avoid double taxation on the corporate income. The S corporation is also responsible for taxes on certain passive incomes as well as built-in gains (IRS, 2012).

There are certain characteristics or conditions that have to be in place in order to qualify for S corporation status; it has to be a domestic corporation. It must have only the allowable shareholders (which include individuals, trusts and estates. Partnerships, alien shareholders and corporations are not included here). It must have no more than 100 shareholders. Must have only one class of stock and must not be an ineligible corporation like insurance companies, financial institutions and domestic international sales corporations. The corporation must then apply for this status by submitting Form 2553 duly filled and signed by all shareholders.

Ethical issues

Bearing the fact that the taxation is based on individual tax returns, the individual shareholders can be made to unfairly bear the losses as precipitated by another or other individuals in the running of the corporation. This may be in the form of negligence in management or oversight in key issues, hence spreading the effect to other shareholders who did not participate in the mess.

The other ethical issue concerns the taxation on the wages of the shareholders for any income that the company receives, even if the shareholders did not receive any income from the company. This is unlike the C Corporation where shareholders are taxed only when they receive dividends. This provision becomes unethical since it subjects the shareholders to losses and denting of their other sources of income.

According to the Internal Revenue Service requirements, all the shareholders are required to make a salary. This implies that all the investors and shareholders are considered employees of the corporation alike, and therefore their wages are equally taxed (AllBusiness, 2012). If the investor offers services to the corporation, he will be additionally considered an employee to that capacity. This remuneration and taxation them becomes unfair since the investor expects returns in a larger scale than the other shareholders.