What is S-Corporation?

There is a regular company that has 100 shareholders or less and that goes through the net income or loss to shareholders for tax purposes (similar to a sole proprietorship or partnership). Since all income is “through” directly to shareholders that include income individual income tax returns, S-Corporation is not subject to taxation.

An eligible domestic companies (C-Corporation) can avoid double taxation (once to shareholders and return to the company) by electing to be treated as an S-Corporation. In general, the S-Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Income taxes are S-Corporation shareholders a share of the income or loss Corporation.

S-Corporation vs C-Corporation

• As C-Corporations, S-Corporations are separate legal entities from the shareholders of, and under state law, generally provide its shareholders with the same liability protection to shareholders of C-Corporations.
• Unlike C-Corporations, for Federal income tax purposes taxation S-Corporations similar cooperation. Thus, income is taxed at the shareholder level and not at the corporate level.
• Certain penalty tax (eg accumulated earnings tax, the personal holding company tax) and the alternative minimum tax does not apply to S-Corporation.
• Unlike the C-Corporation, S-Corporation is not eligible for the deduction Dividends (income tax on dividends received by corporations as other businesses it takes ownership policy object).
• Unlike the C-Corporation, S-Corporation is not subject to 10% of taxable income limitation applies to a charitable contribution deduction.

Who can form S -Corporation?

S-Corporations are more suitable for small and family businesses, and for those who start their business with little investment. Also, some existing businesses qualify for S-Corporation status.

to form an S-Corporation or to change your current C-corporation in the S-Corporation (also known as “The election of S-Corporation status”) certain conditions must be met :.

• S-Corporation can not have more than 100 shareholders
• All shareholders must be US citizens or residents, estates or certain trusts.
• can have only one class of stock. Preferred stock is not allowed.
• profit and loss will be awarded to the owners in proportion to their holdings.
• Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies the business purpose.
• Shareholders can not reduce the loss in excess of their investment.
• company can not reduce benefits to employees who hold more than 2% of the party.

S-Corporation Features

• Form S-Corporation makes generally pass business losses through a personal income your tax return, which you can use it to offset any income you have from other sources.
• Shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your earnings are used to pay Social Security and Medicare taxes devices.
• When you sell your party, your taxable profit on the sale of the company can be less than it would have been to run business as usual corporation.

Taxation S-Corporations

As already mentioned above, S-Corporations are not subject to tax rates. Instead, S-Corporation passes through the profit (or loss) to shareholders and earnings are taxed at the rate of individual taxes in the form of each shareholder 1040. The pass-through (sometimes called “perfusion”) nature of income means the profit S- Corporation are only taxed once – at shareholder level. The IRS says it this way: “On the tax return, the shareholders of S-Corporation share of specifically identified items Corporation income, deduction, loss, and credit, and their share not specifically stated income or loss”.

S-Corporations avoid the so-called “double taxation” of dividends in most states. There are, however, two exceptions to this rule:

• California There is a franchise tax of 1.5% of the net income of S-Corporation (minimum $ 800) . This is one factor to consider when choosing between the LLC and S-corporation in California. The highly profitable company, LLC franchise tax fees, which are based on gross income may be lower than 1.5% net of income tax. However, the high gross revenue, low profit margins of companies, LLC franchise tax expenditure could be S-Corporation income tax net.
• New York City S-Corporations are subject to full tax at a 8.85% rate. However, if the S-Corporation can demonstrate that part of its business was done outside the city, that part will not be subject to additional tax

Retaining Earnings S. -Corporation

S-Corporations are allowed to retain net profit as operating capital. However, any gains are considered if they were distributed to shareholders, and consequently shareholders might income they never received (the shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).

Converting S-Corp Back C-Corp

S-Corporation status is not permanent and can be turned back if so desired. For example, if the business will be profitable and there are tax benefits to regular C-Corporation, S-Corporation status register can be reduced by a certain time.