1 - 4 Corporations Must file articles of incorporation with state Limited Liability - shareholders are only at risk for their capital investment Centralized management Unlimited Life - death of an owner or transfer of stock ownership does not end the corporation’s legal existence Owners can be employees and receive tax-free employee fringe benefits
1 - 4 Corporations Form 1120 due 2½ months after year end March 15 th for calendar year taxpayer Can use calendar year or fiscal year When the corporate rates are lower than the individual tax rates, the owners have increased capital for reinvestment and business expansion Disadvantages Double taxation (dividends are nondeductible) Corporate losses can only offset corporate profits (no flow-through to shareholders)
1 - 4 S Corporations “Small business corporation” Formed the same as a C corporation Reverts to being taxed as C corporation if it ceases to qualify for S status To qualify for S status Domestic corporation No more than 100 shareholders (who generally must be individuals who are not nonresident aliens) One class of stock outstanding File Form 2553 election (must be filed within first 2½ months of year to be retroactive)
1 - 4 S Corporations Limited liability with no double taxation Profits and losses flow through to owners each year Shareholders are taxed on their share of profits even if they receive no distribution Loss deductions are limited to basis (unlike partners, shareholders do not increase their basis for liabilities of the business); excess losses are carried forward Shareholders can be employees but cannot participate in tax-free employee fringe benefits if they own more than 2% of stock
1 - 4 Comparison of Business Entities Conduit entities are attractive in early years when operating losses are likely to occur C corporation losses do not provide a tax benefit until the corporation becomes profitable C corporation tax rates May be lower than tax rates for individual owners resulting in lower taxation for profits that remain in the business
1 - 4 Comparison of Business Entities Employee tax-free fringe benefits are available to employee-shareholders of C corporations Self-employed individuals (including partners and greater than 2% shareholders in S corporations) are not eligible for most tax-free employee fringe benefits Changing from one type of entity to another can be difficult and expensive Except for change from S corp. to C corp.
1 - 4 The End
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- Spring '12
- Taxes, Taxation in the United States, Wealth transfer taxes