Explained - Generally people refer
to two separate types of corporations, "C" corporations
and "S" corporations. In reality, they are both
the same type of entity under state laws governing corporate
formation. Every S corporation starts out being a "C"
corporation. To become and "S" corporation, a
"C" corporation files an election with the Internal
Revenue Service to be treated differently under tax laws.
HOW IS THE
Subchapter S ELECTION MADE - A Subchapter
"S" election is made by filing a properly completed
IRS From 2553 with the Internal Revenue Service. It is important
that this election be made within the right time frame and
that the election be properly completed. This is one area
of forming your corporation where it pays to consult with
BEWARE OF TIME
LIMITS FOR MAKING Subchapter S ELECTION - There
are time limits after formation when an election must be
made with the IRS in order to receive the tax treatment
of a Subchapter "S" corporation for the year that
the corporation is formed. This decision does not have to
be made immediately upon formation, but it cannot be delayed
for too long if you want the immediate tax year advantages
of Subchapter "S' Status.
YOUR ACCOUNTANT - Generally for true
small businesses, Subchapter "S" status will be
advantageous. However, the final decision should not be
made without consulting with you accountant.
WHAT IS THE
PURPOSE FOR MAKING A SUBCHAPTER "S" ELECTION -
If you file for Subchapter "S"
status, you are electing to treat the corporation as a"pass-through"
entity for income tax purposes. All of the implications
of making this election are beyond the scope of this guide.
However, generally speaking, if you make the election all
of the profits and losses of the corporation will be passed
onto the individual tax returns of the shareholders in proportion
to their shareholdings. Generally speaking, the corporation
will not be treated as a taxable entity.
WHY CAN THIS
BE AN ADVANTAGE - Again, speaking
very generally, the reason this election is normally made
is to avoid being taxed twice for the income of the corporation.
Where the election is not made, the corporation will be
a taxable entity and will pay tax on it's net income at
corporate income tax rates. When distributions are made
to shareholders out of the net earnings, those shareholders
will pay income tax again...thus resulting in taxation at
both the corporate and individual levels. Although there
are other ways of mitigating this tax effect which you should
discuss with your accountant, making a Subchapter "S"
election is the most common method used by most small businesses.
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