The owners of any business, irrespective of the size, can benefit from incorporating. With the Tax Reform Act of 1986, the S Corporation became a highly desirable entity for corporate tax purposes. An S Corporation is a special tax designation granted by the IRS to corporations. Many small business owners and entrepreneurs prefer S corporation because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure. One person can form an S corporation, but is restricted to no more than 75 shareholders. The corporation must be formed in the United States and all shareholders must be individuals. The advantages of S corporations include limited personal liability, pass-through of losses, no corporate taxes and no shareholder FICA tax on net income.
When S corporation is elected, the income, losses and other elements of tax treatment, flow directly to the shareholders. S corporation generally provides employee benefits and deferred compensation plans. The stock of S corporations is freely transferable. Free exchangeability of interest means that shareholders are able to sell their interest without obtaining the approval of other shareholders. S corporations may be advantageous in terms of self-employment taxes. S corporations can save their owners self-employment or Social Security/Medicare taxes.
If your corporation desires to retain earnings, S corporation status can be used to avoid penalty taxes that could be imposed on an unreasonable accumulation of earnings. S corporation status strikingly reduces the potential problem of IRS claims of excessive compensation of shareholders. Tax savings can be realized on all taxable income of the corporation because individual tax rates are lower than corporate tax rates. If your corporation expects to generate capital gain income, the S corporation can make distributions to its shareholders and pass the capital gain of the income directly to shareholders. If the S corporation generates substantial cash not used in the operation of the corporation, that cash can be distributed to a shareholder on the basis of his or her ownership interest in the corporation.
S Corporations provides detailed information on S Corporations, S Corporations versus C Corporations, S Corporation Forms, S Corporation Advantages and more. S Corporations is affiliated with Limited Liability Corporation Definition.
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