Question

1. what is closely held corporation, a personal holding company, and a personal service corporation?
2. what are S Corporations?   advantages and disadvantages of S Corporations. example of a type of business suitable. May corporations be formed as S Corporations or no? Please explain and include information on S Corporation Election. thank you

Answer 1

Solution:

Corporation:
A business corporation is for-profit limited liability or unlimited liability entity, that has a separate legal personality from its members. A business corporation may be privately held called as "close" or "closely held" that is held by a few people or publicly traded

A closely held or closed corporation also referred to as a closed corporation it is a firm whose stock is held by a small number or very less number of people. To qualify as a publicly traded company with closely held status. A minimum number of shares must be held by all persons outside the business such as members of the public at large corporations.

Closely held corporation is any company that has only a limited number of shareholders hence, its stock is exchanged infrequently, but which are often listed on public exchanges. Although they also trade on over the counter exchanges

And these entities are differ from privately owned firms, that have stock and is not publicly traded on an exchange neither listed nor over the counter. Those who own shares of closely held corporations should also consult a financial planner with expertise in the tax and estates that come with this type of stock. Because, questions of liquidity insider status and majority stakeholder responsibilities may come into action.

Despite the fact the any corporation's stock is listed many transactions between major shareholders and closely held corporations do not receive the same preferential tax calculations as those of corporations with actively traded stocks. For parties involved in these transactions deductions and losses may not be allowed in some instances.

A closely held corporation is also referred to as a closed corporation. It is a firm whose stock is held by a small number of people, while this may also include traditional investors and it may also be held by the family members or other insiders associated with a particular business, to qualify as a publicly traded company with closely held status, it must be a minimum number of shares must be held by persons outside the business such as members of the public at large corporations, and the shares of a closely held company is known as closely held shares.

Example: There a significant number of closely held corporations in USA. One of the best examples is Hobby Lobby, this is a privately held family owned business, operates in the arts & crafts industry. It is one of the biggest hobby supply stores in the country

Definition of S corporation: An S corporation also known as "S subchapter" refers to a type of corporation that meets the specific Internal revenue code requirements, the requirements gives a corporation with minimum 100 shareholders or less number then the benefit of incorporation while being taxed as partnership. The corporation may pass income directly to shareholders and avoid double taxation

Requirements include being a domestic corporation not having more than 100 shareholders, which includes only eligible shareholders and having only one class of stock and the stock associated with Hobby Lobby is not traded publicly. Rather the stock has been issued to a small group of family members who operates the business as a privately held S Corporation.

All of the large and publicly traded companies started out this way. Example - Ford Motors was originally owned by Henry Ford himself until he took an other investors and eventually took the company as public.

Another example of a large family owned business is Koch Industries. Valued at more than $55Billion, Koch Industries is owned by the Koch family.

S corporation advantages and disadvavantages

S corporation advantages:

The advantages of an S corporation often exceed any perceived disadvantages. The S corporation structure can be especially beneficial, when it comes in to time, to transfer ownership or discontinue the business. These advantages are typically not available to sole proprietorships and general partnerships.
below are the mentioned S corporation advantages
Protected assets: An S corporation protects the personal assets of its shareholders
Pass-through taxation: An S corporation does not pay federal taxes at the corporate level any business income or loss is passed through to shareholders who report it on their personal income tax returns.
Tax-favorable characterization of income: An S corporation shareholders can be employees of the business and draw salaries as employees and they can also receive dividends from the corporation as well as other distributions that are tax-free to the extent of their investment in the corporation.
Straightforward transfer of ownership: Interests in an S corporation can be freely transferred without triggering adverse tax consequences.
Cash method of accounting: corporation must use the accrual method of accounting unless they are considered to be small corporations. S corporations however, usually don't have to use the accrual method unless they have inventory.
Heightened credibility. Operating as an S corporation may help a new business establish credibility with potential employees, customers, partners and vendors, because they see the owners have made a formal commitment to their business.
S corporation disadvantages
An S corporation may have some potential disadvantages:

Formation and ongoing expenses: To operate as an S corporation, it is necessary to first incorporate the business by filing Articles of Incorporation with your desired state of incorporation obtain a registered agent for your company and pay the appropriate fees. Many states also impose ongoing fees such as annual report and or franchise tax fees. Although these fees usually are not expensive, and can be deducted as a cost of doing business, they are expenses that a sole proprietor or general partnership
Tax qualification obligations: Mistakes regarding the various election, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status. Although this is relatively rare and usually can be remedied easily it is still an issue that is not a factor with other business forms.
Calendar year: An S corporation must adopt a calendar year as its tax year unless it can establish a business for having a fiscal year.
Stock ownership restrictions: An S corporation can have only one class of stock, although it can have both voting and non voting shares. hence, there cannot be different classes of investors who are entitled to different dividends or distribution rights.
Closer IRS scrutiny: An amounts distributed to a shareholder can be dividends or salary the IRS scrutinizes payments to make sure the characterization conforms to reality.
Less flexibility in allocating income and loss: An S corporation cannot easily allocate losses or income to specific shareholders.
Taxable fringe benefits.