With the tax season upon us, we’d like to help shed some light on tax issues. Every Friday for the next several weeks we will discuss how the following tax considerations apply to different business entities. (Look for the little piggies!) The considerations are:
- 1. Pass through of gains
- 2. Pass through of losses
- 3. Transfer of assets to the entity, and
- 4. Transfer of assets from the entity
This week we’re going to cover the S-corporation.
What is an S-corp?
For starters, an S-corporation starts just like a normal C-corporation. The letters (S & C) are designations from subchapters of the IRS code. Most corporations are C corporations. An S corporation is a corporation that has made a special election to be taxed in a certain way. Because of this special treatment, there are additional rules and restrictions on top of the standard corporate law requirements. Continue reading
For many small business owners, understanding labor and employment law can be seriously confusing. Paying an attorney to help explain labor law specifics can be extremely expensive, thus creating another road block. Still, for all business owners, understanding labor laws is paramount. For example, it is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Continue reading
One of the most difficult steps in the start-up process is deciding which business structure fits your business idea best. There aren’t that many options, but the distinctions between the types of entities can be overwhelming. A lawyer can help you make the decision but with a little research, you may be able to choose yourself. Here are some pros and cons of the major business structures you can choose from.
Sole Proprietorship. A sole proprietorship is the default business structure if you don’t file anything with the Secretary of State. This isn’t always the best choice for everyone, as it can result in a higher frequency of audits and it doesn’t provide protection for your personal assets and you can be personally liable for business debts. However, it is simpler to get started and the profits or losses can be reported on your personal tax return, without filing separately. Continue reading
Congratulations! You incorporated your business! Now comes the dreaded question: now what? One of the most common obstacles encountered by new businesses is their own fear or self-doubt. With confidence and a good network of other entrepreneurs, starting and growing a business can happen quite easily. It takes persistence and focus, but it can be done. Having good resources – other entrepreneurs, experienced business owners – who can serve as a sounding board is extremely important. Continue reading
There are many people who consider S-Corporation election when forming their new corporation. An S-Corporation offers both advantages and disadvantages that regular C-Corporations do not, and may be beneficial depending on what type of business you run and how you would like to run that business. S-Corporations operate similarly to regular corporations, but are taxed in a manner that is similar to a Limited Liability Company.
For example, the main difference between an S-Corporation and a regular C-Corporation is that the profits and losses of the S-Corporation are passed on to the various shareholders in the corporation. The shareholders are then taxed on their individual share of the corporation’s profits or losses and report this on their individual tax returns. Continue reading
The standard “corporation” format used by businesses to protect personal assets and minimize personal liability can also include other types of business entities, including S-Corporations and Limited Liability Companies (“LLC”). The corporation is America’s most popular and oldest form of business entity. However, with the tax advantages of Limited Liability Companies and S-Corporations, other types of business entities are quickly becoming more popular.
Limited Liability Companies
An LLC combines the limited liability shield traditionally associated with corporations, the structural and financial flexibility of partnerships, and the tax benefits of “pass-through” taxation. As a pass-through entity, the LLC pays no income tax. Instead, items of taxable income, gain, loss, and deduction pass through the LLC to its owners, and are reported by them on their separate income tax returns. Similar to the corporation, an LLC is recognized as a separate legal entity from its “members.” Thus, an LLC can own property and commit itself to contractual obligations.
IRS Treatment of the One-Member LLC
An LLC with only one member/owner is automatically considered to be a sole proprietorship unless an election is made to be treated as a corporation via IRS Form 8832. Thus, the sole member of an LLC will file Form 1040 (U.S. Individual Income Tax Return), and will include Form 1040, SCHEDULE C (Profit or Loss from Business) with his/her tax returns.
Regardless of how many members the LLC has, the LLC may file an Election to be Treated as a Corporation for Purposes of Taxation (IRS Form 8832). If an election is made to be treated as a corporation, the LLC must file Form 1120 (U.S. Corporation Income Tax Return).
This year’s deadline for electing S-Corporation status is approaching fast - March 15, 2008.Now’s the time to consider whether your corporation should elect “S-Corporation” status. An S-Corporation begins its existence as a general, for-profit corporation upon the filing of Articles of Incorporation at the appropriate state office. Once formed, a general for-profit corporation that has not requested “S-Corporation Status” with the IRS will be required to pay income tax on taxable income generated by the corporation. In addition, any dividends distributed to shareholders may be subject to taxation as dividend income to that shareholder as well (hence the problem of “double taxation” that can occur in a ‘Non-S-Corporation’). However, after the corporation has been formed, it may elect “S-Corporation Status” by timely submitting IRS form 2553 to the Internal Revenue Service. Certain states require that your corporation file state-specific forms to qualify for S-Corporation status in that state for state taxation purposes. In addition, S-Corporation status is not available for purposes of state tax liability in certain states. Please contact your state’s taxing authority for further information.Once this filing is complete, the S-Corporation is taxed in a manner similar to a sole proprietorship or partnership, rather than as a separate entity. Thus, the income is “passed-through” to the shareholders for purposes of computing tax liability. Therefore, each shareholder’s individual tax return will report the income or loss generated by the S-Corporation.
Most entrepreneurs prefer the S-Corporation structure for the following reasons: · The S-Corporation combines many of the advantages of the sole proprietorship, the partnership, the corporation, and the LLC into one entity.· Unlike sole proprietors and partners in a partnership, shareholders of an S-Corporation are afforded the same level of limited liability and personal asset protection as are the shareholders of a general, for-profit corporation.· In an S-Corporation, shareholders avoid the “double-taxation” common to shareholders of non-S-Corporations because all income or loss in an S-Corporation is reported only one time on the personal income tax returns of the S-Corporation’s shareholders. Where a corporation claims income from a passive investment (e.g. from real estate owned) for three consecutive years that exceeds 25% of the corporation’s gross receipts, S-Corporation status may be terminated by the IRS. Most real estate investors, for example, prefer placing real property in an LLC (Limited Liability Company) rather than an S-Corporation for this very reason Continue reading