Basics of an S Corporation - WXOW News 19 La Crosse, WI – News, Weather and Sports |

Basics of an S Corporation


S Corporation status gives you the liability protection of a corporation, and allows you to pay taxes on the same basis as a sole proprietor or partnership, that means you pay tax at the personal rate and your profits are your salary. S Corporations limit the number of corporate shareholders to 75, stipulate that all shareholders be U.S. citizens, and require that shareholders be individuals rather than other corporations or estates. The only exceptions are tax-exempt, charitable organizations.

Many tax and legal experts recommend S Corporation status for smaller entities and start-ups. It can provide you with corporate liability protection, and potentially reduce your tax burden. In addition, if your business experiences a loss in its first year, you can generally pass that loss through to your personal income tax return. There are other potential tax advantages as well, including the ability to deduct (as an investment interest expense) interest you incur to buy S Corporation stock. However, tax laws vary from state to state. The tax division of your state treasury department can tell you how S corporations are taxed in your state. It’s also a good idea to speak with your accountant or tax advisor.

On the downside, S Corporations are limited in terms of the number of deductions for fringe benefits such as heath insurance, group term life insurance, deferred compensation plans, and others. While a C Corporation can deduct these benefits for all owner-employees, an S Corporation cannot deduct them for an owner-employee who owns 2% or more of the corporate stock.

To become an S Corporation, all shareholders must file and sign IRS Form 2553. Shareholders pay income tax on their share of the corporation's income, regardless of whether they actually received the money or not. If the corporation suffered a loss, shareholders can claim their share of that loss.

Most states follow the federal pattern of not imposing corporate tax on an S Corporation, but instead taxing the shareholders. Be aware, however, that some states tax an S Corporation the same as a C Corporation. You might want to contact the tax division of your state treasury department to find out how this is handled in your state.


Advantages

  • Corporate liability protection for shareholders

  • Profits are taxed at the personal rate

  • Potential to write off losses against personal income tax



Disadvantages

  • Requires more paperwork and is more expensive than partnership or sole proprietorship

  • No benefit deduction for owner-employees with 2% or more of corporate stock

Copyright (c) 2008 Studio One Networks. All rights reserved.

INFORMATIONAL DISCLAIMER The information contained on or provided through this site is intended for general consumer understanding and education only and is not intended to be and is not a substitute for professional financial or accounting advice. Always seek the advice of your accountant or other qualified personal finance advisor for answers to any related questions you may have. Use of this site and any information contained on or provided through this site is at your own risk and any information contained on or provided through this site is provided on an "as is" basis without any representations or warranties.
*DISCLAIMER*: The information contained in or provided through this site section is intended for general consumer understanding and education only and is not intended to be and is not a substitute for professional advice. Use of this site section and any information contained on or provided through this site section is at your own risk and any information contained on or provided through this site section is provided on an "as is" basis without any representations or warranties.
Powered by WorldNow
All content © Copyright 2000 - 2014 WorldNow and WXOW. All Rights Reserved.
For more information on this site, please read our Privacy Policy, Terms of Service and Mobile Privacy Policy & Terms of Service.

Persons with disabilities who need assistance with issues relating to the content of this station's public inspection file should contact Administrative Assistant Theresa Wopat at 507-895-9969. Questions or concerns relating to the accessibility of the FCC's online public file system should be directed to the FCC at 888-225-5322, at 888-835-5322 (TTY) or at fccinfo@fcc.gov.