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| S Corporations
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The double taxation problem of the C corporation
is eliminated, taxes on profits are paid only
at the shareholder level. For tax purposes the
Sub S corp is referred to as a "pass through"
entity, meaning that tax liabilities pass to the
shareholders. This is the major reason that Congress
created the Sub S corporation status. But
there is a limit to the number of shareholders
and they generally must be humans. Shares
cannot be held by other corporations (either C
or Sub S), or by partnerships or LLCs. Trusts
may hold Sub S shares but only with special
provisions. Major advantages are the pass thru
tax status, the ease of buying and selling stock,
and the limited liability of the members.
Sub S corporations can have deductible employee
stock ownership plans (ESOPs) and
employee pension plans for both owners and
non-owner employees. But many other employee
benefits, when given to the owners of
the S corporation, are not deductible to the corporation.
Some disadvantages are the required
annual reporting to the state and annual formalities
such as shareholder and directors’
meetings, lack of privacy and franchise taxes at
the state level.
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