Other than the standard corporation or partnership, there are other types of business entities that are worth looking into for your business.
For example, S Corporations are simply corporations that have a special tax status. It is formed as a corporation at the state level and then you select S corporation with the IRS. It has the same form as a C Corporation and is typically governed by the same state corporate laws. However, unlike a C corporation which is taxed on its earnings and may face the issue of “double taxation” when it issues a dividend to its shareholders, an S corporation is a pass through entity.n the standard corporation or partnership, there are other types of business entities that are worth looking into for your business.
The pass through status means that, rather than the entity paying income tax, its owners pay tax for their share of the earnings of the entity, and the entity is not taxed for dividends distributed to its shareholders. Thus, this eliminates double taxation. However, in exchange for this special status, the S corporation has certain restrictions such as:
- Restrictions on the number of shareholders (100);
- Shareholders must be individuals, estates, non-profits, or certain trusts;
- May not have any shareholders who are “non-resident aliens”; and
- May only have one class of stock
Ultimately, S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
Thus, for a small business, operating as an S corporation avoids the “double-taxation” that would otherwise be paid if both the corporation and shareholder paid tax on the income distributed to its shareholders.
But remember, “S corporation” is not a business entity type. A corporation is a business entity type. An S corporation is simply a corporation whose shareholder or shareholders have elected to have their corporation taxed under Subchapter S of the Internal Revenue Code. Therefore, the first step for anyone wanting to use the S corporation structure is to form a corporation.
If you need help with your business, contact Rafael Rodriguez, business attorney, at Rodriguez Lopez, APC. Rodriguez Lopez APC, can help your business from startup to defense.
Check us out on Avvo: https://www.avvo.com/attorneys/91226-ca-rafael-rodriguez-5136333.html
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