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S-Corporations

Advantages

      • Most Popular
      • Very Flexible for membership
      • Least costly
      • No personal liability for LLC debts
      • Simplest tax filings and tax preparation
      • Income taxed only once at individual tax rates


Disadvantages

      • Not as well known or understood as corporations
      • Formalities of regular meetings and minutes recommended

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Overview

A “corporation” is a business entity created by one or more owners (“shareholders” in corporate parlance) under state laws to conduct one or more lawful businesses. Corporations have been prevalent in every state. Even though the laws are generally similar from state to state, there are some variances. A corporation is a separate legal entity from its owners/shareholders. The corporation’s owners/shareholders are generally not personally liable for the debts of the corporation so long as the corporation formalities are followed. A corporation is governed by a board of directors, not by its shareholders, in accordance with the terms of its Articles of Incorporation and its Bylaws (or applicable state laws if there are no Bylaws). Corporations are created by filing its Articles of Incorporation with the applicable state.  Annual reports must be filed each year (usually at the anniversary of the formation your company or a date designated by the state) to avoid late fees and eventual administrative dissolution. Generally, a corporation must register as a “foreign entity” if it conducts business in states other than its state of incorporation.

What is a Subchater S?

To avoid the “double taxation” applicable to Subchapter C corporations, shareholders may file an election to be treated as a Subchapter S corporation. Subchapter S corporations are treated like “partnerships” which are “pass-through entities.”  Subchapter S corporate earnings are “passed-through” without tax at the corporate level so that such earnings are taxed only once at the individual shareholder level. 
The “Subchapter S” election includes certain restrictions and is available to certain “smaller corporations” and their shareholders. Over time these “Subchapter S” restrictions were seen as too restrictive. The “limited liability company” was created to broaden the availability and flexibility of “pass-through” tax treatment. Like Subchapter S corporations, LLC’s that elect “disregarded entity’ or “Subchapter S” treatment, “pass-through” their earnings without tax. Earnings are taxed only once at the individual owner level.