| Many businesses start life as an s-corp and when | | | | Like an LLC, S-corporation losses flow through to the |
| profitable become c corps to benefit from income | | | | individual shareholders and can offset your other |
| splitting and fringe benefits. Alternatively they form an | | | | income. However, you cannot deduct a loss greater |
| LLC which is simpler to form and operate but offers | | | | than your stock basis. |
| the same personal liability protection. | | | | Your stock basis is generally the total money and |
| S corps don't pay federal corporate income tax but | | | | property you put into the business. |
| they do have to file a tax return - Form 1120S | | | | To qualify for S-Corp status: |
| reporting the profits or loss of the business. K-1 forms | | | | •No more than 75 shareholders are allowed. |
| are then given to the shareholders who report the | | | | Venture capitalist are often put off by this sort of set |
| figures on their individual tax returns. | | | | up. |
| Salaries and bonuses paid by your S-corp are subject | | | | •Non US citizens are not allowed to be |
| to income tax and self-employment tax but dividends | | | | shareholders |
| are only subject to income tax - there is no | | | | •Individuals, certain partnerships and other S |
| self-employment tax. | | | | Corporations can be shareholders but S Corporations |
| State Taxation | | | | cannot be owned by C Corporations, other S corps, |
| •Most states tax s-corps the same as the | | | | many trusts, LLCs and partnerships. |
| Federal Government does. | | | | •S Corporations can only issue one class of |
| •The shareholders are subject to state | | | | stock - common stock. Your ownership percentage |
| income taxes on their share of the profits. | | | | determines your percentage of the pass through |
| •Some states require you to make an extra | | | | income. This is different to LLCs where the |
| S-corporation election. | | | | percentage of pass through income does not have to |
| •Some states do not recognize | | | | be the same as ownership percentage. |
| s-corporations and treat s-corporations like | | | | •Your interest is freely transferable, which |
| c-corporations. | | | | means you can sell it without the approval of other |
| Your s-corporation will still be an s-corporation for | | | | shareholders. LLC members need approval from the |
| federal tax purposes but not for state tax purposes. | | | | other members. |
| This means you will have to file a state tax return. | | | | •Your ownership interest is easy to sell or |
| Some states such as California, New York and New | | | | transfer to family members. This can be time |
| Jersey tax both the s-corporation and the | | | | consuming and costly for a sole proprietor or |
| shareholders - a form of double taxation. However, the | | | | partnership. With corporations your ownership of all the |
| corporate tax rates are usually modest. | | | | business assets is wrapped up in the stock you hold |
| If you want to set up an s-corporation contact your | | | | and all you have to do is sign over your stock. |
| state income tax office and ask them whether a | | | | •The corporate structure allows you to easily |
| separate state s corporation election is required and | | | | sell shares in the company through stock offerings. |
| how s-corporations are taxed. | | | | This is useful for attracting investors and employees. |
| Losses | | | | |