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Business Formation - Corporation and S Corp

A corporation is a business entity formed to make a profit. Why else would you spend all the time and money to form a corporation if it wasn’t to make a profit? (Yes, you could form a non-profit corporation, but even though the owners don’t personally profit from the enterprise, the organization is still run to generate revenue and profit so it can deliver the services it was formed to provide.) It is run by a board of directors who are elected by the shareholders. A corporation is considered a separate legal entity from its owners, who are called shareholders and can own property, sue, and be sued in a contract. It provides liability protection for its owners’ personal assets.

Corporations are subject to double taxation. The net income of the business is taxed before the profits are distributed to the shareholders. Then the shareholders must pay taxes on their dividends from the corporation. This can be avoided by electing to be taxed as an S corporation.

An S corporation is a business corporation that allows the shareholders to deduct the business’s operating expenses from their personal tax returns. The shareholders have made an election to be taxed under subchapter S rather than subchapter C, which is the normal corporate tax section. The shareholders are responsible for paying the tax on the income the company earns. An S corporation is like a sole proprietorship for tax purposes, which means it will report its income and expenses from the corporation on the individual shareholder’s tax return. This allows the shareholders to avoid double taxation by paying corporate tax, as well as the individual income tax on profits, and possibly the payroll tax on the corporate owner’s income.

After forming the corporation, if you choose to make a subchapter S election, you must obtain and complete Form 2553 from the IRS. Since an S corporation is primarily a tax structure, I recommend talking to a certified public accountant to make sure you file the proper paperwork and follow the required formalities.

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