Characteristics and Income Taxation of Business Entities - Corporations

Corporations

S-Corp
An S-Corp is a closely held corporation that elects not to be treated as a normal corporation. If it meets certain requirements, the S-Corp will not be taxed for the income, as it passes as taxable income to the shareholders. This type of entity is designed for small corporations with minimal shareholders.


Pertinent data of S-Corporations:
Liability: Limited
Nature of Owner's Income: W-2 income and ordinary income

Federal Tax Forms used for S-Corps:
Income Tax: Form 1120S
Estimated Tax: 1120-W (corporation only) and 8109
Employment taxes: 941 (943 for farmers), 940, and 8109.

Federal Tax Forms for S-Corp shareholders:
Income Tax: 1040 and Schedule E
Estimated Tax: 1040-ES
Additional forms for excise taxes

Compensation reported: W-2, Schedule K-1

Advantages:
Avoids double taxation with payment of dividends
Business continuity
Individual tax rates are usually less than corporate tax rates
S-Corp does not pay corporate tax on its income

Disadvantages:
No more than 75 shareholders
Must be a domestic corporation
No non-resident alien shareholders
Only one class of stock
Individual, trust and estate shareholders only

C-Corp
A corporation is essentially a legal entity created under specific state law for the purpose of conducting a business or philanthropic activity.



Pertinent data of C-Corporations:
Liability: Limited
Nature of Owner's Income: W-2 income and dividend income

Federal Tax Forms Used:
Income Tax: Form 1120
Estimated Tax: 1120-W
Employment Taxes: 941 (943 for farmers), 940
Additional forms for excise taxes.
Compensation reported: W-2 (income); 1099DIV (dividends)

Advantages:
Limited liability
Transferability of interest
Centralized management
Continuity of life
Access to corporate benefit plans (medical, life, dental, 401k, etc.)
Unlimited shareholders & multiple classes of stock (in most cases)

Disadvantages:
Majority shareholders control the vote
Corporate form must be observed at all times
Double taxation of earnings

Trust


Related Articles
  1. Taxes

    Explaining Double Taxation

    Double taxation refers to income taxes being imposed twice on the same source of earned income.
  2. Taxes

    Understanding the W-2 Form

    The W-2 Form is a standard Internal Revenue Service (IRS) form that employers are required to furnish employees at the end of each year.
  3. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  4. Taxes

    3 Federal Income Tax Facts You Didn't Know

    Learn about three federal income tax facts that most Americans may not know from one of the most trusted financial resources on the Web.
  5. Taxes

    Tax Haven Vs. Tax Shelters: Is There a Difference?

    Learn about the difference between tax havens and tax shelters, and how both are used to reduce tax liability or avoid paying taxes altogether.
  6. Taxes

    Do Tax Cuts Stimulate The Economy?

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Taxes

    Understanding Income Tax

    Income tax is a levy many governments place on revenue of entities within their jurisdiction.
  8. Personal Finance

    3 Ways To Avoid The Dividend Tax Hike

    Find out how you can offset the potential tax hikes.
  9. Entrepreneurship

    Taxes in New York for Small Business: The Basics

    Learn how small businesses are taxed in New York, and understand how tax rates vary based on whether the business is an S corporation, LLC or partnership.
  10. Savings

    Explaining Tax Returns

    A tax return is the form or forms used to file income taxes with the IRS.
RELATED TERMS
  1. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. ...
  2. W-2 Form

    The W-2 form reports an employee's annual wages and the amount ...
  3. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  4. Consumption Tax

    A tax on the purchase of a good or service. Consumption taxes ...
  5. Marginal Tax Rate

    The amount of tax paid on an additional dollar of income. The ...
  6. IRS Publication 542

    A document published by the Internal Revenue Service (IRS) that ...
RELATED FAQS
  1. How does the effective tax rate for an individual differ from that of a corporation?

    Read about the effective tax rate for individuals when compared with the effective tax rate for corporations, including how ... Read Answer >>
  2. How does the marginal tax rate system work?

    The marginal tax rate is the rate of tax that income earners incur on each additional dollar of income. As the marginal tax ... Read Answer >>
  3. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  4. What are the differences between regressive, proportional and progressive taxes?

    Understand the differences between the most common tax systems including regressive taxes, proportional taxes and progressive ... Read Answer >>
  5. How are effective tax rates calculated from income statements?

    Learn how to read an income statement and how to find the information necessary to calculate a company's effective income ... Read Answer >>
  6. Is the marginal tax rate a progressive tax?

    Learn how the marginal tax rate is a progressive tax that takes a higher percentage of income tax from high-income earners ... Read Answer >>
Hot Definitions
  1. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  2. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  3. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  5. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center