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Once again the darling form for many businesses. Find out why during this information-packed course. Practical, real-life examples give you ideas to apply immediately for your S Corporation clients. Review the advantages of the S Corporation tax rules. Minimize your client’s tax bill with the latest business and tax strategies that make S Corporations so popular. Comply with the unique tax reporting rules for completing Form 1120S. Decide if an S Corporation is your client's entity of choice.
Objectives:Prerequisite: None
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Chapter 1
Why Subchapter S?
Learning Objectives
Upon completion of this chapter, you will be able to
Introduction
In this chapter, we will discuss the following:
Deciding whether to incorporate, and then whether to operate as an S or a C (regular) corporation, or partnership, is not easy. In this course, we will examine some of the advantages and disadvantages of incorporation and then go through the requirements for electing to be an S corporation, as well as the rules for operating an S corporation.
During the course, we will address practical situations that occur in the operations of S corporations and will examine some tax return issues. A copy of the S corporation tax return, Form 1120S, and Schedule K-1 can be found at the end of Chapter 10.
Our discussion starts with a question - why should your client consider being an S corporation, or even a C corporation, at all? Why not operate as a proprietorship, if there is one owner, or as a partnership, if there is more than one owner?
Advantages of Corporations
Most corporations are formed because the corporate entity offers some protection against personal liability. Unlike a general partner or proprietor, shareholders are generally liable for loss only to the extent of their investment. As a practical matter, however, before making a loan, a lending institution will usually insist that individual shareholders in a closely held corporation agree in writing to be personally liable for the debt. Although a professional person normally cannot protect himself from liability arising from personal negligence, he/she may be able to protect him/herself from lawsuits arising from the negligence of other professionals in the corporation.
This non-tax factor - the liability shield - can be very important, and, indeed, in many cases, may be the sole reason for incorporating.
Continuity of Organization
A corporation's existence depends on its charter and its outstanding stock, rather than circumstances relating to the owners of the stock. Therefore, the death, insanity, bankruptcy, retirement, resignation or expulsion of any shareholder will not, in itself, cause dissolution of the corporation.
Transfer of Interest
Shares of stock in a corporation can be transferred with relative ease. This provides gift and estate planning opportunities that are not so readily achievable in other forms of doing business. It also makes it easier to give a "piece of the action" to key employees or relatives who are moving into the business. If real estate is held outside of the corporation, or in a separate corporation, shareholders can sell or transfer stock in the business, while still retaining their ownership of the real estate.
Ordinary Deduction for Stock Losses
Under Sec. 1244, a loss realized because of the sale or worthlessness of C or S corporation stock may qualify as an ordinary loss, rather than a capital loss. A loss arising from disposition of a partnership interest is generally a capital loss.
Disadvantages of Corporations
Double Taxation
Both regular corporations and, to a much lesser extent, S corporations pay tax at the corporate level. There can also be tax at the shareholder level when the income is distributed or passed through. There is never a tax at the partnership level.
Cost of Organization
Generally, the cost of incorporating is more than the cost of forming a partnership. Certain formalities and technicalities such as state filings, writing up bylaws, issuing stock, changing title to assets, and holding organizational meetings are all required. And attorneys' fees are also a normal expense of incorporating.
Rigidity of Operation
A partnership has more flexibility in its operation than a corporation. A partnership can make special allocations of certain income and expense items, if there is substantial economic effect for the allocations. Corporations must keep minutes of formal meetings, deal with complex payroll records, and file additional tax returns. Furthermore, S corporation items of income, loss, deduction, and credit must be allocated to shareholders based on the number of shares held by each shareholder.
Liquidation
The complexity of liquidation is another disadvantage of the corporate form. Liquidation must be formal, and many potential tax traps exist. Both the corporation and the shareholders may incur tax when the corporation liquidates.
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