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Advantages of forming an S-corporation


Avoid dou­ble taxation

A C-corporation has its prof­its taxed twice. All pub­licly traded cor­po­ra­tions are C-corporations, so let’s take the exam­ple of Google, Inc.. When Google makes money, Google, Inc. has to pay taxes on these prof­its. But when Google, Inc. dis­trib­utes these prof­its to its share­hold­ers in the form of a div­i­dend pay­ment, the poor share­holder has to pay taxes again.  This way, the IRS taxes Google’s prof­its once on the level of the cor­po­ra­tion and once on the level of the share­holder. Unfair ? Unjust ? but cur­rent tax law.

The advan­tage of an S-corporation is that its prof­its are only taxed once, on the level of its share­hold­ers. At the end of the tax year, the S-corporation just files a form with the IRS say­ing: We made so much money, and by the way, the indi­vid­u­als listed below are the guys who are going to pay taxes on these prof­its. The share­hold­ers will receive a copy of this fil­ing and will include their share of the S-corporation income in their tax return.

Don’t pay 15 % in Social Secu­rity and Medicare taxes

The S-corporation might dis­trib­ute some of its prof­its to its share­hold­ers as prof­its instead of salary. Any­body receiv­ing a salary has to pay approx­i­mately 15 % taxes on Social Secu­rity and Medicare. Pay­ments from S-corporation to its share­hold­ers can be prof­its and not salary. This way the share­holder does not have to pay the 15 % on Social Secu­rity and Medicare taxes.

The cor­po­ra­tion has to be rea­son­able as to which pay­ments it labels prof­its and which it will cat­e­go­rize as “salary”. Pay­roll taxes are only due on the “salary” part.

Lim­ited Liability

Sim­i­lar to a C-corporation or a lim­ited lia­bil­ity com­pany (LLC) the cor­po­rate entity gen­er­ally shields share­hold­ers and direc­tors from the debts and oblig­a­tions of the com­pany. A sole pro­pri­etor (or a gen­eral part­ner­ship) will have to sell off his house, car and other assets to sat­isfy his or her busi­ness debts. (Sell­ing off the house is not nec­es­sary when you live e.g.  in Florida. Why do you think retired busi­ness or OJ live in Florida, where nobody can touch their residences).

Cor­po­ra­tions can live forever

Its share­holder, direc­tors, offi­cers, and even the cute sec­re­tary will even­tu­ally kick the bucket. What remains are their yel­lowed pho­tographs on the wall, but the cor­po­ra­tion con­tin­ues its exis­tence in eter­nity (or until it goes bust). Proprietorships and most part­ner­ships dis­solve upon the death of an owner or part­ner. This can be rather incon­ve­nient when the excite­ment of a lucra­tive deal trig­gers a heart attack just at the wrong moment. Sud­denly, every­thing stops, since the pro­pri­etor­ship or part­ner­ship cease to exist. When an S-corporation share­holder dies, his or her estate gets the shares, the CEO is replaced and busi­ness con­tin­ues as usual (just one more  -soon to be yel­lowed– pic­ture on the cor­po­rate wall of memory).

And what else

Maybe now you want to know how to set up a cor­po­ra­tion, how to get S-corporation instead of C-corporation sta­tus, how to write min­utes of board of direc­tor meet­ings and so on. Please feel to browse the infor­ma­tion in these posts.

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