Subchapter S Corporation (S-corp)

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A subchapter S corporation is no different than a c-corporation in organization or operation. The primary difference, or in some cases advantage, is the income tax status and treatment of the s-corporation. S-corporations generally never sell stock on the public stock markets, and are usually private family owned businesses. S-corps allow owner/managers to avoid paying taxes twice. When the owners pay themselves what is considered reasonable compensation for their job classifications, the corporate income will be reported on for 1120-S, and then passed through to the shareholders on Schedule E.

The owner, like the partner, then reports that share on the 1040 series and pays taxes at the individual rate. Limited Liability Company (LLC) The limited liability company is a combination of a corporation and a limited partnership. A joint venture, when incorporated, becomes a limited liability company. The owners are called members instead of shareholders. Ownership is defined in the LLC charter, not by stock ownership. The members may be only financial investors, only managers, or both.

What is unique about the LLC is its ability to choose whether to be taxed as a partnership or as a corporation. The LLC, may file any of the IRS forms, Schedule C, 1120 series, or 1065 series depending on the number of members. The benefit is that taxes are passed on to the members and taxed at the corresponding individual rate. How would you analyze the tax implications of each organization? All businesses with employees, regardless of type of structure and organization, will pay FUTA, federal unemployment taxes, state unemployment insurance, and workers compensation insurance.

Workers compensation may vary from state to state and by job classification. They must also match their employees social security and medicare taxes, and withhold and deposit the employees federal, state, and local tax liabilities. The most important tax implications for business is level or amount of taxation and complexity of paperwork. The sole proprietorship has the least amount of paperwork required for income tax reporting, and depending on the actual profit may pay at the lowest income tax rate or have no tax liability at all, if the business incurs a loss.

Partnerships, corporations, and LLCs will file two tax returns, one for the business and one for the individual. 1120s and 1065s also require additional record keeping and reporting of business assets and liabilities in addition to income and expenses. Finally the traditional C-corp must pays double taxes along with the additional record keeping and filing requirements. Conclusion An individual owner may be overwhelmed by the filing requirements of a corporation.

A group of owners may reduce the overall tax burden by filing a partnership or s-corp return and paying at the individuals’ tax rates. Business owners must weigh several factors when deciding what legal form of organization to use. Tax implications should play a major role in this decision. Tax implications are not only limited to how much tax will be paid, but also include the amount of record keeping required to file certain types of tax returns.

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