Question

What facts would you select to either support an S Corp premium or refute a premium?

Answer 1

The definition of an S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS) to be considered an S corporation. S corporations are taxed nder Subchapter S of the Internal Revenue Code (IRC), which is where their name is derived from (Subchapter S Corporation). What does that mean?

And/Or we can said A S corporation, for United States federal income tax, is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S corporations do not pay any income taxes.

One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the owners' personal assetsare shielded from the claims of business creditors—whether the claims arise from contracts or litigation.

S corporation advantages

The advantages of an S corporation often outweigh any perceived disadvantages. The S corporation structure can be especially beneficial when it comes time to transfer ownership or discontinue the business. These advantages are typically unavailable to sole proprietorships and general partnerships. S corporation advantages include:

• Protected assets. An S corporation protects the personal assets of its shareholders. Absent an express personal guarantee, a shareholder does not have personal liability for the business debts and liabilities of the corporation. Creditors cannot pursue the personal assets (house, bank accounts, etc.) of the shareholders to pay business debts. In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable.
• Pass-through taxation. An S corporation does not pay federal taxes at the corporate level. (Most—but not all—states follow the federal rules. View the Ongoing Corporation Requirements page of our state guides to see if your state recognizes the federal S corporation election.) Any business income or loss is "passed through" to shareholders who report it on their personal income tax returns. This means that business losses can offset other income on the shareholders’ tax returns to reduce income tax paid. This can be extremely helpful in the startup phase of a new business. (A corporation that does not elect S corporation status and accumulates passive income is at risk of being classified as a personal holding company.)
• Tax-favorable characterization of income. S corporation shareholders can be employees of the business and draw salaries as employees. 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. A reasonable characterization of distributions as salary or dividends can help the owner-operator reduce self-employment tax liability, while still generating business-expense and wages-paid deductions for the corporation.
• Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences. (In a partnership or an LLC, the transfer of more than a 50-percent interest can trigger the termination of the entity.) The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred.
• Cash method of accounting. Corporations must use the accrual method of accounting unless they are considered to be small corporations. (A small corporation has gross receipts of $5,000,000 or less.) 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 customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.

An S corporation may have some potential disadvantages, including:

• Formation and ongoing expenses. ...
• Tax qualification obligations. ...
• Calendar year. ...
• Stock ownership restrictions. ...
• Closer IRS scrutiny. ...
• Less flexibility in allocating income and loss. ...
• Taxable fringe benefits.