| Once you decide to form a corporation for your | | | | filing the designation, of course, you must have your |
| business entity, you will quickly be faced with another | | | | employer identification number. This can be obtained |
| question. Should the corporation pay taxes as a "C" or | | | | with Form SS-4. |
| "S" corporation? | | | | It is important to remember that there are restrictions |
| There is a lot of confusion when it comes to the tax | | | | on what corporations can file as "S" with the IRS. The |
| designation of a corporate entity. The first thing to | | | | designation is only available to small business |
| understand is a corporation is a "C" designation by | | | | corporations that are domestically formed. Further, the |
| default. As a "C" entity, the corporation will file and pay | | | | corporation can have no more than 100 shareholders |
| its own taxes with profits and salaries being paid out | | | | and all must unanimously agree to the election. The |
| to employees and shareholders. Since the employees | | | | shareholders cannot be other businesses, although |
| and shareholders have to pay personal taxes on the | | | | there are some exceptions where business trusts are |
| distributions, "C" corporations are considered double | | | | involved. A shareholder also may not be a non-resident |
| taxation entities. This is generally viewed as a negative | | | | alien. Finally, the corporation may only have one class |
| thing. | | | | of stock, although voting rights may differ. |
| An "S" corporation is the government's answer to the | | | | One area where state law can cause problems with |
| double taxation issue. The entity essentially acts as a | | | | the s-election is in the field of community property. |
| pass through tax structure. The "S" corporation files a | | | | Certain states like California view marriage as |
| tax return with the IRS, but it is only an information tax | | | | conveying certain rights to both spouses whether they |
| return. This means no tax is paid. Instead, the finances | | | | realize it or not. If you live in such a state, your |
| of the company are passed through to the personal | | | | non-involved spouse must also consent to the "S" |
| tax returns of the shareholders. The shareholders then | | | | election or it may be ruled invalid. Why? They |
| report and pay tax to the IRS accordingly. | | | | essentially own part of your share position in the |
| To gain "S" corporation status, you must take | | | | corporation. |
| affirmative steps with the IRS. Specifically, you must | | | | Making the "S" designation for a corporation is not |
| file an application to be designated as an "S" | | | | overly difficult, but many new entities run into problems |
| corporation. The application in question is Form 2553. | | | | because they fail to take care of the designation in a |
| This form must be filed within 2 and ½ months | | | | timely manner. Make sure you stay on top of the filing |
| of the creation of the entity or in the year prior to the | | | | or you will have to wait for an additional year to make |
| year you wish the designation to be made. Prior to | | | | the designation. |