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A Subchapter "S" Corporation, appears and operates as a regular "C"
Corporation, but it is taxed differently. Any profit, or loss is "passed through" to the stockholders and taxed on the stockholders' individual income tax returns. In other words, the
Subchapter "S" Corporations pay no corporate income tax and the stockholders pay personal income tax on the
Subchapter "S" Corporation's profit.
A corporation is normally formed by an individual or by individuals, who request permission to operate as a corporation by filing "Articles of Incorporation" with a particular state.
Upon approval by the state, the corporation is legally formed, and is a regular "C" Corporation.
"S" Corporations are the most
popular, and in my opinion,
the most favorable form of doing business:
-
Profits are taxed only once, at the shareholder level on the personal
income tax return of the shareholder.
- Profits (or dividend distributions) are
not subject to payroll taxes
(FICA, Medicare, or Unemployment taxes), which saves you and the
corporation
a substantial amount of payroll taxes.
- These profit distributions (also called
dividends) allow social security
recipients to collect their business profits as dividends, without a
reduction in their social security benefits, because these dividends
are
deemed "unearned income."
- In the case of an IRS audit
disallowance, there is only one level of
income tax (income tax due by the shareholder.) Compare that to a
"C"
Corporation, where an IRS disallowance of an expense that is deemed to
be a
personal expense, would be subject to 2 taxes: corporate income
tax and
personal income tax to the shareholder because the disallowance is
deemed to
be a "constructive dividend" to the shareholder.
- "S" Corporations are not
subject to the "Personal Service Corporation"
FLAT TAX rate of 35%.
Summary: Most business owners, who need to withdraw their corporate
profits
for living expenses, should consider an "S" Corporation.
Business owners
whose businesses do not need to retain the profits, such as for expansion,
or
for the purchase of additional inventory, should also consider an
"S"
Corporation. And finally, retired business owners, who want to
collect
their full social security benefits, can derive their business profits as
unearned income by taking "dividends" from their S corporation.
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