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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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