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
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