Question

1.What makes S Corps different from Partnerships?

2.What is the major difference between S Corporations and regular old C Corporations?

Answer 1

Hello,

Basing on the above question,the following answer is given:

1. What makes S Corps different from Partnerships?

Introduction:

A. S Corporations: An S corporation, also known as an S subchapter, refers to a type of corporation that meets specific Internal Revenue Code requirements. The requirements give a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation.

B. A partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.

Differences between S Corporation and Partnership: Mainly there are 8 types of following differences:

** Ownership Laws: In an S corporation, ownership is limited to U.S. citizens or residents. These limitations do not apply in a partnership. S corporations cannot have more than one class of stock; therefore incomes and losses are distributed according to the same criteria among all owners. Where as Partnerships, on the other hand, have some flexibility in the way profits and losses are distributed.

** Contributions of Owners: The partner's contributions of appreciated property to the business is tax-free for all partners, but similar contributions by S corporation shareholders to a corporation might be eligible for taxes in some circumstances.

** Borrowed Starting Capital: S-Corp owners are not allowed to include borrowed funds as owners' basis. Partners, on the other hand, can include their borrowed share of the money as basis.

** Tax Implications: Owners of both entity types must pay personal income tax. Active partners, in addition, are required to pay self-employment taxes. This is not the case with S corporation owners. Employee shareholders do not pay self-employment taxes. Rather, employee shareholders must earn a salary from the business and pay FICA taxes. Dormant shareholders or partners do not pay any payroll taxes.

** Formation: Starting a partnership is relatively easy and generally does not require filing any paperwork with the state. A business that desires S-corp treatment, however, is required to first register either as a corporation or a limited liability company. The business must meet IRS requirements to file for S-corp treatment.

** Maintenance Requirements: Businesses treated as S corporations must file annual or biennial reports with the state. If the business is a corporation, it must hold formal meetings. These requirements do not apply to partnerships.

** Structure: Partnerships have minimal structural requirements. The basic requirement is that the partners have equal say even if their shares in business are not equal. Partners can even agree on a profit and loss allocation method that is not based on their respective shares of the business. S-corps that are registered as corporations are required to have a formal management structure that includes a board of directors and officers. The only basis for allocating profits and loss in an S-corp is the number of shares the shareholder has.

**Liability: Owners of general partnerships are exposed to liability arising from debts incurred by the partnership. The personal assets of partners can be sold to cover debts from the partnership. This can be circumvented if the owners register as a limited partnership. In this case, all but one of the partners can have limited liability. All owners of an S-corp, on the other hand, have limited liability protection.

2.What is the major difference between S Corporations and regular old C Corporations?

The Major difference between S Corporations and C Corporations is:

** C corporations: C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal taxable income. Corporate income tax is paid first at the corporate level and again at the individual level on dividends.

**S corporations: S corps are pass-through taxation entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” to the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.

** The biggest difference between C and S corporations is taxes. A C corporation pays tax on its income, plus you pay tax on whatever income you receive as an owner or employee. An S corporation doesn't pay tax. Instead, you and the other owners report the company revenue as personal income.

Thank You......