S-Corporation
An S-Corporation enjoys some unique benefits when it comes to federal taxes.
Mainly, it can avoid being taxed twice - once to shareholders and again to the
corporation by electing for S status. Once accepted, the company is exempt from
federal income taxes except for certain taxes on capital gains and passive income.
Shareholders only need to include their share of the company's separately stated
items of income, loss, and credit, and a share of nonseperately stated income or
loss on their tax returns. While such status can be a great benefit to a business, an
attorney can help navigate through some of the intricacies of tax law to avoid
potential issues and problems.
Qualifications for S-Corporation Status include:
Must be an eligible entity
Must not exceed 100 shareholders
Shareholders must be U.S. citizens or residents
Must have only one class of stock
Profits and losses must be proportionately allocated to shareholders
according to each one's interest in the business
Some issues may arise when a company that previously held a C status converts to
S status. In certain circumstances, the business may have to pay income taxes on
profits they made when it operated as a C-corporation. Additionally, owners of an
S-Corporation must understand that the company will not be taxed on profits, but
the owners themselves will be taxed on their proportional shares of the company's
profits. Additional taxes need to be paid in certain states and areas. Many of these
issues can be overcome with the aid of a lawyer trained in the specifics of tax and
corporate law.
In California, for example, S-Corps must pay a franchise tax of 1.5% of net income.
Other places, such as New York City, require that S-Corps pay full corporate income
tax at a rate of almost nine percent. S-corporations must file income tax using the
1120S form, estimated tax using an 1120-W form, and employment taxes using
941 and 940 forms. Shareholders must file taxes using a separate form. An
attorney is often necessary to ensure that such matters are handled accurately and
to avoid legal complications.