Question

Brighton, Inc. is currently a C corporation. Brighton has 10 shareholders and has substantial amounts in retained earnings from previous years. Brighton’s officers are considering becoming an S corporation. Describe the process Brighton will need to undertake to become an S corporation and list the advantages and disadvantages of this change in business form.

Answer 1

C corporation & S corporation

These two corporate structures are different in terms of tax filing. C corporations pay tax on their income plus tax is to be paid for the income earned by the owner. But S corporations do not pay tax, but the owner report the company income as his personal income.

In order to become S corporation, there must be less than 100 shareholders in C corporation.

The following are the process to be undertaken to become S corporation

1. The corporations has to complete the formalities with IRS to change the taxation mode.
2. Preparation of Articles of Association
3. Registration of basic details like name, address, incorporation date, state etc
4. Mention first day of tax year
5. Details of Shareholders details and obtain their signatures

Advantages of S Corporation

1. The shareholders of S corporation can become employees
2. Personal assets of owners have the protection of limited liability
3. Ownership is easily transferable by selling the stock
4. The corporation continue to exist even the owner dies
5. Additional capital can be easily raised by selling shares
6. S corporation helps to avoid the problem of double taxation

Disadvantages of S Corporation

1. Expenses for formation of corporation is high
2. Stock ownership restriction is there for S corporation. No of shareholders must be less than 100
3. Closing of IRS scrutiny
4. Flexibility to allocate income and loss are not flexible
5. Ownership is limited to one type of stock only

These are the advantages and disadvantages of S corporation.