S-Corporation: The Good, the Bad, the Scary (Part 1)

Some time ago I started writing a series of columns discussing potential tax problems posed by various business structures.  “Avoiding the Hobby Tax Trap” presented the danger, consequences, and how to avoid having a business reclassified as a hobby by the IRS.  “Business Owners: Lower your Red (Audit) Flags” warned sole proprietors of three audit triggers commonly found on their tax returns.  One most recent column, “Home Office Deduction Danger” discussed the (often overlooked) requirements for claiming the Home Office deduction. For those interested, these articles are available at both http://www.journal-news.net and http://hbsbusiness.com.

Today I will begin a discussion on S-Corporations.  The basics and their potential benefits for owners.  But first a word of warning: Business structures are highly complex.  Any single article (or series of articles) will barely scratch the surface.  The tax benefits provided by a particular business structure at one end of the business life-cycle can quickly become a major tax-headache at the other.  Before choosing a particular structure, research your options and obtain professional assistance from both an attorney and tax professional. Then, make this important decision yourself.  It is, after all, your business.

Overview: S-Corporations are “elected” business structures for tax purposes.  One does not file with the Secretary of State to become an S-Corporation.  Instead, an eligible domestic (US based) corporation of other eligible entity (for example an LLC) files Form 2553 to elect to be treated as a S-Corporation for tax purposes. 

An S-corporation can have up to 100 eligible “shareholders.”  Generally, only US citizens or resident aliens, estates, and certain trusts and estates can be shareholders.  S-Corporations are also only allowed to have one class of stock.

Potential Benefits:  There are several benefits S-Corporations can provide to owners.  A few are listed below.

Today’s column has discussed the potential benefits of S corporations.  Later columns will visit the many tax-challenges that accompany these benefits.  As always, this article or any article does not constitute tax advice.  If you would like to speak with a tax professional, please feel free to contact our office to make an appointment.

 

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