Question

An S corporation is considered a flow-through business entity that has the advantages of both the corporation and proprietorship. Discuss the general rules that govern S corporations. What are some of the operational rules that effect various code provisions on S corporations? Go to www.irs.gov (Links to an external site.)Links to an external site. and provide a synopsis of the similarities and differences between S corporations and one other form of business.

Answer 1

Advantages of a corporation versus a sole proprietorship or partnership

Shareholders in a corporation are not liable for corporate debts

This is the most important attribute of a corporation. In a sole proprietorship or a partnership, the owners are personally responsible for business debts.

If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc.

to make up the difference. On the other hand, if a corporation runs out of funds, its owners are usually not liable.

Please note that under certain circumstances, an individual shareholder may be liable for corporate debts, if, for example, a shareholder personally guarantees a corporate debt.

Also, under certain circumstances, a court may determine that justice requires disregarding the corporate form and treating the acts and liabilities of a corporation as the acts and liabilities of the shareholders.

This is sometimes referred to as "piercing the corporate veil." Some of these circumstances where a court may decide to pierce the corporate veil include:

If personal funds are intermingled with corporate funds

If a corporation fails to have director and shareholder meetings

If the corporation has minimal capitalization or minimal insurance

If the corporation fails to pay state taxes or otherwise violates state law (like defrauding customers)

Synopsis of the similarities and differences between S corporations and one other form of business.

A business structure, in terms of the legal entity you choose for your business, significantly impacts some important issues in your business life, including exposure to liability, and at what rate and in what manner you and your business are taxed.

Your choice of corporate structure can also substantially affect issues such as financing and growing the business,

the number of shareholders the business has, and the general manner in which the business is operated.

You should be aware of some of the differences in business formation, especially when choosing between an LLC or S corporation for your business.

Both LLCs and S corporations surged to the forefront around the time of the Small Business Job Protection Act of 1996

which contained a number of changes to basic corporate tax law, such as enabling S corporations to hold any percentage of stock in C corporations.

C corporations, however, are not allowed to own stock in S corporations.