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