An S
Corporation
is a form of business classified for federal income tax purposes as a
corporation that has elected to be taxed as a pass-through entity, in a
manner
similar to a partnership or sole proprietor.
Unlike a regular corporation, or a C corporation, an S
corporation (both
names derive from sections of the Internal Revenue Code) generally is
not
subject to federal income tax. Instead
its income is reported on the tax returns of its shareholders, and they
have
the responsibility for paying the tax.
If there are losses suffered by the corporation, they also pass
through
and are reported on the shareholders’ income tax returns.
Because only the shareholders,
not the corporation, are taxed, S corporations avoid the problem of
double
taxation associated with C corporations.
This is the biggest draw for creating an S corporation,
particularly for
closely held corporations.
Shareholders in an S corporation,
like shareholders in a C corporation, generally have limited liability
arising
from corporate matters, even though they pay taxes as if they were
partners or
sole proprietors. In addition, when the
corporation is eventually sold, there can be reduced taxable gains, as
compared
with the sale of a business operating as a C corporation.
On the downside, the limitation
on classes of stock in an S corporation provides less control over the
company
and the value of its stock. Potential
outside investors likely will not be attracted by the pass-through tax
characteristics of an S corporation, nor by the limit on the number of
shareholders. Although corporate taxes
are avoided, there is still a requirement for filing an informational
tax
return every year for a corporation with more than one owner. Finally, if avoiding formalities is an
important consideration, it should be noted that, like any other
corporation,
an S corporation must follow the requirements for having regular
meetings and
keeping company minutes.
The balancing of the advantages
and drawbacks of S corporation status in any given case is sufficiently
complex
that it is advisable to seek professional advice
before
making this important choice.
Note: This article provided by Craig Welscher a Houston, TX based attorney. You can contact Craig through www.welscherlaw.com
