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"S"
Corporations
In
General: The “S-Corporation”
follows the same state formalities as does a C-corporation
(i.e. filing Articles of Incorporation and paying
state fees). However, an S-Corporation must make a
special tax election using IRS Form 2553. The “S”
comes from subchapter S of the Internal Revenue Code
which controls the method of taxing profits and operations.
No
Double Taxation: A traditional corporation,
known as a C-corporation, is taxed as a separate entity,
leading to double taxation. An S-corporation, on the
other hand, is a corporation that elects to be treated
as a pass-through for tax purposes. S-corporations
are thus not subject to double taxation. Therefore,
a shareholder's individual tax returns will report
the income or loss generated by an S corporation.
Moreover, the accounting for an S-corporation is generally
easier than for a C-corporation.
Self-Employment
Tax Savings: In an S-corporation, profits
are treated as dividends to the owner and are thus
considered unearned income and not subject to self-employment
taxes. This can be a significant savings as self-employment
taxes are approximately 15% and can add thousands
of dollars to your tax bill. Only earnings actually
paid out to an owner as compensation for services
are subject to self-employment taxes.
Restrictions
Placed on S-Corporations:
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The S-corporation must not have more than 75 stockholders.
(A married couple is treated as one stockholder).
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Each
stockholder must be an individual who is a citizen
or resident of the United States, or an estate or
qualifying trust of such person.
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The
corporation must have only one class of stock. (However,
voting differences within a class of stock are permissible).
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The
corporation must use the calendar year as its fiscal
year unless it can demonstrate to the IRS that another
fiscal year satisfies a business purpose.
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Not
more than 25% of the corporation's income can come
from passive activities, such as annuities, dividends,
rents, royalties, etc.
Electing
to be an S-Corporation: A “new”
corporation wishing to become an S-corporation must
file form 2553 with the IRS and may also need to file
with the State. These forms generally must be filed
no later than 75 days after the corporation has began
conducting business as a corporation, acquired assets,
or has issued stock to shareholders (whichever is
earlier). An “existing” corporation which
desires to become an S corporation must make it’s
election by March 15 if the corporation is a Calendar
year taxpayer in order for the election to take effect
for the current tax year.
Annual
Tax Filings: The S-corporation files its
own annual corporate tax forms each year using IRS
form 1120S. Requisite State forms may also be required.
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