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Incorporation is one of our specialties, and many of our clients come to us because they want to incorporate their business. Chapter 1, Subchapter S of the Internal Revenue Code allows smaller businesses to avoid paying federal, and usually state, corporate income tax.
In order to qualify, your corporation must have fewer than 100 shareholders and issue only one class of stock. If you decide to elect S-Corp status, you must file Form 1120S by the 15th day of the third month of the tax year, or the government will tax your business as a standard C-Corporation. S-Corporations are the perfect fit for those small businesses that are looking to raise money through selling a limited number of shares, but don’t want to pay income tax twice. And, of course, if you have any questions about Corporations or S-Corporation elections, feel free to leave them in the comments below, or give us a call at 1 (877) 692-6772 – we’re happy to answer any questions you might have! Good news on a hot day in July!  The 2016 version of the “S Corporation Modernization Act” has been introduced the House and the Senate.  Led by Senators Thune (R-SD) and Cardin (D-MD) and Representatives Reichert (R-WA) and Kind (D-WI), the bill includes a half-dozen provisions designed to improve the rules that govern S corporations.
Yesterday’s introduction of companion bills is the first time in a while that the S corporation community has had this important legislation being championed in both bodies, and we really appreciate the hard work the members and their staffs put in to get the provisions just right.
Including the new internal basis adjustment provision to ensure that S corporation assets receive similar treatment as partnerships. The proposed regulations also significantly impede the ability of businesses organized as subchapter S corporations to utilize their cash effectively. In order to qualify as an S corporation, an entity must have only one class of stock (identical rights to distribution and liquidation proceeds) and must be owned only by eligible shareholders (examples of ineligible shareholders include C corporations, foreign corporations, partnerships, insurance companies and non-resident aliens). Provide exceptions to ensure that S corporations do not inadvertently terminate their status when debt is reclassified as equity.
The rules should exempt S corporations which clearly cannot be a focus for the issues of concern regarding the Proposed Rules. As our members know, S-Corp wears two hats when it comes to advocacy – one is defensive where we protect S corporations from bad tax policy.  The other is proactive and seeks to improve the S corp rules. Does this mean a markup of member-driven proposals is in our future?  That remains to be seen, but the fact that the Committee is giving members an opportunity to speak about their respective efforts is promising, and we will continue to work with our friends on the Committee both to protect S corps from bad policies and to fight for improved rules. Based on Treasury’s April 4 press release, the proposed 385 regulations are designed “to further reduce the benefits of and limit the number of corporate tax inversions, including by addressing earnings stripping.” Nonetheless, even a cursory review of these regulations clearly indicates that they go far beyond cross-border mergers and apply to a wide range of ordinary business transactions by global and domestic companies both in and outside the United States.
Indeed, the proposed 385 regulations affect all aspects of both a company’s capital structure and the funding of its ordinary operations and fundamentally alter the U.S. We noted in a previous post that these regulations pose a particularly acute threat to S corporations.  All the concerns listed above apply to S and C corporations alike, but S corporations also face the possibility that they could lose their classification and be forced back into the C corporation world. Just in time for our annual Board meeting, S-Corp Champions Dave Reichert (R-WA) and Ron Kind (D-WI) introduced legislation to improve the rules governing S corporations!  Entitled the S Corporation Modernization Act of 2015 (HR 2788), the legislation would help ensure that the more than 4.6 million S corporations are able to compete and thrive today’s economy. With the S-Corp Board in town, we’ll be up on the Hill visiting key tax writers and building support for modernizing the S corporation rules. The “tax statuses” are defined by federal law but corporations and LLCs are formed by state governments, each of whom have their own laws and regulations. The information contained in this site is provided for general information only and should not serve as a substitute for legal advice from an attorney familiar with the facts and circumstances of your specific situation. In this video I explain what the different types of entities are, such as General Corporations, LLCs, Non-Profit Public Benefit Corporation, and more, which then can send the election to the IRS to be taxed certain way.


If you liked this article, you may love our exclusive content we send to our newsletter members. Mission StatementQuint Tax Service’s mission statement is “to help our clients achieve their financial objectives by serving as their tax and financial partner”.
This objective is intended to be achieved by adapting to individual cultural necessities and desires of their client base. After all, incorporation helps protect you in the event of a lawsuit, and forming a separate business entity helps separate the company’s debts from your private assets.
S-Corporations are the most popular type of corporation in the United States, with 61.9% of all active corporations filing Form 1120S to apply for S-Corp status. If your corporation qualifies, you can file for S-Corp status, which will allow any income earned by the corporation to pass through the business, untaxed, directly to the shareholders. You should also check with your state’s secretary or department of corporations to see whether or not the state respects the pass-through structure of an S-Corp. In addition to this, you have to adhere to all of the other regulations that you would with a standard C-Corp – that means holding shareholder meetings, board meetings, and filing an annual report. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. In particular, the bifurcation rule in the proposed regulations, which allows the IRS to treat a debt instrument as part debt and part stock, could cause a subchapter S corporation to lose its S status and become taxed as a C corporation. S corporations under common ownership, however, are not permitted to file a consolidated tax return and thus, the proposed regulations apply to commonly-owned S corporations, even those with solely domestic activity. Vern Buchanan (R-FL) was able to educate the committee on the importance of tax rate parity.  For a decade – between 2003 and 2012 – all forms of business paid the same top rate.  Today, as a result of the Fiscal Cliff and Obamacare, C corporations continue to pay the same 35 percent top rate, but the rate on pass throughs is nearly 45 percent! If the shareholders meet certain criteria they can choose to become an S corporation, and avoid the double-taxation of the C corporation. However, our customers also often ask us about a real caveat to incorporation – double taxation.
You, of course, still have to pay your personal income taxes, and by law must take a reasonable compensation as a wage. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. The NAM strongly recommends that subchapter S corporations be exempted from the final regulations. Dave Reichert (R-WA) discussed his S Corporation Modernization Act which makes a number of improvements to the S corporation rules, including opening the door to foreign investment into S corporations.  As Rep. Whether an instrument is debt or equity has significant, collateral consequences to business operations that go well beyond the interest deduction on the instrument and include the legal classification of an entity, eligibility for withholding tax exemptions under tax treaties and the ability to file a consolidated tax return.
The S Corporation Modernization Act of 2015 includes a number of those improvements, and we’re looking forward to working with our sponsors and other supporters to get them enact this Congress. S corporations, like LLCs taxed as partnerships, are pass-through entities, meaning that the profits and losses of the business pass through to the owners of the business. After you incorporate, your business has to pay a tax on any income that it earns, subject to the federal and state corporate income tax rates. California, for example, levies a 1.5% income tax on anything earned by S-Corps in the state.


These issues present a severe impediment to the use of intercompany financing for even normal operations and will significantly increase the cost of capital and limit the amount of capital available to invest in the United States. S Corps Posted on June 9, 2013 by Joe WallinSuppose you’ve decided that you want to form your new business as a corporation (not an LLC), and you are trying to figure out if it should be an S Corp or a C Corp.
Well they cannot be compared, since the LLC is a State Entity and the S-Corp is an election before the IRS to be taxed certain way.
The S corporation, even if it only has one owner, does have to file a tax return, but it is an informational return. On top of that, you still have to pay tax on income you earn from working for the corporation. There are a number of limitations to qualify a corporation as an S corporation for tax purposes, however:There can only be one class of stock. Effectively, this taxes the same amount of income twice, and that heavy burden frightens many small business owners, most of whom don’t have much extra capital to throw around.
Investors will often want a separate class of stock, called preferred stock, which will be separate from the class of stock owned by the founders of the business.There can only be US natural persons as stockholders. There is, happily, a way to avoid double taxation, and it is the subject of our Business Basics post for this week – filing for S-Corporation status.
Foreign individuals, LLCs, corporations, trusts and other entities as stockholders are not allowed.There can be no more than 100 stockholders.
This may not be a concern for quite a while, but it is a limitation to be mindful of.The S corporation can be a great way to start out when you will meet the S corporation rules and are not sure if you will want to raise outside capital or not.
Your corporation will be able to issue equity incentives with favorable tax treatment, and your corporation would not need preferred stock unless and until it raises outside capital. The founders of the business can enjoy the benefit of pass-through taxation during the initial phase of the business, and, unlike a LLC, the business will not have to convert its structure in order to raise outside capital.
This restriction can arise unexpectedly, and must be considered whenever issuing equity, including stock options or warrants.
Formerly, Bo was a Systems Engineer and the founder and CEO of a startup software-as-a-service company. S corporations, in contrast, can only have 100 shareholders, generally cannot have non-individual shareholders, and cannot have foreign shareholders (all shareholders must be U.S. This rule is also generally applicable on liquidation of the entity.Pass-Through of Losses – Generally losses, deductions, credits and other tax benefit items pass-through to a S corporation’s shareholders and may offset other income on their individual tax returns. These returns are subject to passive activity loss limitation rules, at risk limitation rules, basis limitation rules, and other applicable limitations.
Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions.
By using this blog site you understand that there is no attorney client relationship between you and the website publisher.
The website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.Thoughts and commentary on the law of startups.



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