Question

Starr Cardio, Inc. is a small business. Ted, Uma, and eleven other members of the Starr family own all of its stock. Currently, Starr's profits are taxed at the corporate level and, after being distributed to the family members in the form of dividends, at the individual level. Can Starr retain its corporate status but otherwise avoid this double taxation. If so, how?

Answer 1

To avoid the double taxation Starr should re-form as an S corporation. C corporations are known for having “Double Taxation.” which means that C Corporation is taxed at the corporate level on the corporation's net income and afterwards again taxed to the shareholders when the profits are distributed among them. On the contrary S corporations have only one level of taxation. Only the shareholders are taxed at the individual level when their income is allocated to the shareholders.

Any small business who meets specific requirements can qualify for S corporation. Based on the facts given in the question, Starr can qualify for S-Corp whose requirements include:

-- the firm must be a domestic corporation,

-- must own less than a specified number of shareholders

-- should not be a member of an affiliated group of corporations

-- the shareholders have be estates, individuals, or qualified trusts (or corporations in certain cases

-- there must be only one class of stock

-- the shareholder should not be a non-resident alien.