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Understanding S. Corporation Taxation

Understanding S. Corporation Taxation

When setting up a business venture, you've got to think about various things to get done, and your taxes are at the top of the list. You must carry out proper research at the initial stages of forming your business to know the business structure suitable for your business.


There are a lot of organizational forms business owners must choose from to effectively set up their business. Some of these forms include the limited liability company, partnership, S corporation, or sole proprietorship. But our focus is on the concept of S corporation and understanding its taxation. 


S corporation is a type of corporation in Chapter 1 of the Internal Revenue Code in Subchapter S. It also refers to any business that decides to share losses, credit, deductions, and corporate incomes through their shareholders for tax with the advantages of a limited liability leading to reprieve from double taxation. 


For an entrepreneur to turn his business into an S corporation, the company must be established by filling and reporting some documents such as the Articles of Incorporation. You are also required to fill the certificate of incorporation and submit it to the government with an applicable fee. 


When the incorporation process is finalized, the shareholders are required to sign Form 2553 and submit it so the business can get an S corporation designation. From that moment onwards, the taxes will be managed by the corporation's partners on their returns. 


There are specific criteria the business must fulfill before getting the S corporation title. The requirements include:


  • The business must be situated in America. 


  • The business must have 100 or less shareholders. 


  • It must have only the permissible number of shareholders, which includes corporations, partnerships, and non-resident alien shareholders.


  • The business must have only one class of stock.

  • It must not be an ineligible venture which means it shouldn't be some insurance company or financial institution that is not allowed in the S corporation structure. 


The IRS maintains that the S Corporation is exempt from federal income tax, excluding the taxes on peculiar capital gains and other passive income. S corporation is viewed as a form of partnership where taxes are not paid at the corporate level, which makes it such an attractive feature. 


Currently, the S corporation is used by about 4.6 million American companies because of some distinct features such as tax savings and limited liability. If you compare it with other ideas such as partnership and a sole proprietorship, you will realize that it has the edge over them. 


More so, before sticking to an S corporation, ensure that you have thoroughly read and checked the laws that pertain to it, pay close attention to the tax treatment and other additional fees. Get an attorney and accountant who is conversant with the S corporation for further information. 


The S corporation also has very high credibility with customers, partners, etc. This means you wouldn't have done a lot of convincing because they will know it's with a good business structure. Unlike other business entities, it is pretty easy to transfer interest well with an S corporation, and the sale can happen in two ways.


  • A direct sale where the buyer makes the purchase and then an issue serving as the instant transfer of ownership is offered.


  • A gradual sale process entails the purchase being completed over a set period. Regardless of how the purchase and payment plans go, the handover of ownership will be conducted.


If you want to reduce your self-employment tax, establish an independently owned business and operate with a protective shield, you will need the S corporation business framework.


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