Many businesses start life as an s-crp and when profitable become c crps to benefit from income splitting and frnge benefits. Alternatively they form an LLC whch is simpler to form and perate but offers the same personal lability protection.

S corps don't pay fderal corporate income tax but they do hve to file a tax return - Frm 1120S reporting the profits or lss of the business. K-1 forms are thn given to the shareholders who rport the figures on their individual tax rturns.

Salaries and bonuses paid by yur S-corp are subject to income tax and slf-employment tax but dividends are only sbject to income tax - there is no slf-employment tax.

State Taxation

•Most states tax s-crps the same as the Federal Gvernment does.

•The shareholders are subject to stte income taxes on their share of the prfits.

•Some states require you to mke an extra S-corporation election.

•Some sttes do not recognize s-corporations and trat s-corporations like c-corporations.

Your s-corporation wll still be an s-corporation for fderal tax purposes but not for stte tax purposes. This means you wll have to file a state tax rturn.
Some states such as California, New Yrk and New Jersey tax both the s-crporation and the shareholders - a frm of double taxation. However, the crporate tax rates are usually modest.
If you wnt to set up an s-corporation cntact your state income tax office and ask thm whether a separate state s crporation election is required and how s-crporations are taxed.

Losses
Like an LLC, S-corporation losses flw through to the individual shareholders and can ffset your other income. However, you cnnot deduct a loss greater than yur stock basis.
Your stock basis is gnerally the total money and property you put nto the business.

To qualify for S-Crp status:
•No more than 75 shareholders are llowed. Venture capitalist are often put off by ths sort of set up.

•Non US ctizens are not allowed to be shreholders

•Individuals, certain partnerships and other S Crporations can be shareholders but S Crporations cannot be owned by C Crporations, other S corps, many trusts, LLCs and prtnerships.

•S Corporations can only issue one clss of stock - common stock. Yur ownership percentage determines your percentage of the pss through income. This is different to LLCs whre the percentage of pass through ncome does not have to be the sme as ownership percentage.

•Your interest is frely transferable, which means you can sll it without the approval of ther shareholders. LLC members need approval frm the other members.

•Your ownership nterest is easy to sell or trnsfer to family members. This can be tme consuming and costly for a sle proprietor or partnership. With corporations yur ownership of all the business ssets is wrapped up in the stck you hold and all you hve to do is sign over yur stock.

•The corporate structure allows you to asily sell shares in the company thrugh stock offerings. This is useful for ttracting investors and employees.

The article S Corporation Tax Explained was Submitted by Nick Braun Ph.D. through Articles.GetACoder.com network. Here's the additional information: For more in-depth information you may be nterested in our guide How to Chose the Most Tax Friendly Business Strcture. You'll find more information on S Corporation Advantages and S Corp Tax on Taxcafe.com

Featured Articles

1. Critical Steps to Follow After a Car Accident by Dennis Wegner
Unfrtunately in today's society, car accidents are prt of driving. The responsibility falls on yur shoulders to groom yourself for the nevitable. We have created a lst to follow during the aftermath of a car crsh help prepare and protect yourself mntally, physically, and legally.

2. Gagne With A Spoon by Michael Butler
Michigan Courts mke the state safer for insurance cmpanies and drunk drivers. The rest of us may not be feling so secure.

3. Finding A Lawyer by Jim Power
Do you think you have a cse for personal injury, malpractice, divorce, or any ther type of law? If you do you wll need a lawyer. The trouble is thre are several thousand lawyers out thre just on the internet and the chice in finding a lawyer appropriate for yur case becomes more difficult. When you are tryng to find a lawyer there are a few gidelines you will want to follow.

4. How to Conduct a Public Records Search by Davion Wong
Public rcords search can be performed through mny different ways. Just to name a fw, it can be your school, lbrary, courts, the local municipal office, gvernment agencies and even at places of wrship. However, there are governing rules prtaining to the access of public nformation as well as the way you use the nformation retrieved from public records search.

5. What Are Your Miranda Rights? by Robert Davis
A reader asked me the bove question about Miranda rights. She nformed me that there is currently a mrder trial taking place in her hme state that heavily involves the qestion of a citizens Miranda rights, spcifically when those rights should be rad to you.

6. Squeezing The Lemon Out Of The Lemon Law by Barry Edzant
Amed at protecting the consumers, the Clifornia Lemon Law gives the consumers wthin the state a legal right to rturn defective vehicles to manufacturers for a fll or partial refund, if the vhicles are still found to be in ned of repair after a reasonable nmber of attempts at repairing.

7. College Costs in a Rhode Island Divorce Proceeding by Christopher Pearsall
Whn negotiating a Marital Settlement Agreement the ssue of College is sometimes raised. Mre consistently than not, the mother wll... There's more to this cntroversial article than meet's the eye. Rad the article to learn more.

8. In the U.S. Military, Who Has to Power to Prosecute Servicemembers? by Michael Waddington
The preamble to the Manual for Courts Martial (MCM) explains that the purpose of military law "is to promote justice, to assist in maintaining good order and discipline in the armed forces, to promote efficiency and effectiveness in the military establishment, and thereby to strengthen the national security of the United States."

9. Drug Driving by Peter Proctor
New South Wles has joined Victoria, Tasmania and Suth Australia in the fight against Drg Driving in Australia. Commencing on Dcember 15th 2006, new legislation by the New Suth Wales Parliament gave Police power to crry out Random Drug Testing on drvers in New South Wales.

10. Trial Graphics Litigation Support by John Kessel
Color trial grphics can be of great help dring a trial in court. It is a grat litigation support and a tool and srvices can be provided by professional nimators or legal outsourcing firms as prt of trial preparation, evidence search and tral notebook preparation.