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    Considerations Before S Corp Election PDF

    Uploaded by

    ole

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    Determining the corporate form of a business can have utile legal, tax, and fancial implications. Consideration must be given to the operational characteristics of tha company, the number of shareholders, the distribution policy, potential labilty, and many other factors, All ofthese factors are subject to change overtime ‘and, fortunately, the form of a corporation can be changed as Wall Acornmen change in corporate form strom a corporation oan Scorporation due to the beneficial tax atbutes afforded to the individual shareholders, {An & corporation election can be made as long as a corporation Is olglbte and all shareholders consent to the election, Certain © comoratons may frd It advantageous to olect 8 corporation, ‘tatus, C corporations are subject to corporate-fevelincome taxes ‘atthe ently level, while ite shareholders are additionally eubjact tolncome taxes on both dlvidendls and equity capital gain, often raloreed to as “double taxation.” Conversely, 8 corporations are rot subject to Income taxes at the corporate level. Instead, the ‘8 corporation's income and deductions are “passed through” to ‘he personal Income tax retums of is shareholders based on thet pro-rata ownership interest. ‘A.camman miscancep ton with an & corporation elections thatan ' atection wil result the avoidance of corporate Income taxes. While this is technically true In form, it is not tue in substance: shareholdere of § corporations essentially pay corporate Income taxes at ordinary personal Income tax ratos. Based solely on this, Considerations Before Making an S Corporation Election Brian A. Hock — thock@srr.com STOUT|RISIUS|ROSS ‘ne attribute, and given the similarities nthe current top marginal corporate and ordinary personal income tax rates, a shareholder ‘fa C corporation would be Ina similar postion ifthe corporation had made an & corporation slection, Howaver, the primary benefit {or shareholders electing an 8 corporation status is that they do ‘not pay taxes on cstribullons. Furthermoro, any retained income, ‘ofan 8 corporation increases the tax basis of ts shares, allowing ‘ho shareholders to avold capital gains taxes. on any stock ‘appreciation upon a sale. Eligibility Requirements and Limitations Given the benetits of mking an $ election, many corperations choose tobe treated as an S corporation lor fedora income tax purposes, However, In ordar to elect 8 corporation status, te corporation must meet the following recuiremants: Itis a domestic corporation, or a domestic entity eligible to elect to be treated as a corporation, that timely fies Form 2553, Ithas no more than 100 shareholders. A husband and wile and all members of a family and thei estates can be treated as one shareholder for this test. Al others are treated as separate shareholders. Its only shareholders are indviduals, estates, exempt organizations, or certain trusts. 1 woo Ithas no nonresident alien shareholders, Ithas only one class of stock (disregarding diferences in voting rights). Generally, a corporation is treated as having only one class of stock i all outstanding shares of the corporation's stock confer identical rights to

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