Key points: • You pay tax on your share of S corp income whether or not it's distributed to you. • Income is taxed at your individual tax rate , not the corporate rate. • Avoids double taxation because the corporation itself isn't taxed. • The character of income (capital gains, ordinary income, etc.) passes through to you, which can provide tax benefits.
Limits on S Corporations Eligibility requirements:
• Must be a domestic corporation • No more than 100 shareholders • Only one class of stock • Shareholders must be individuals, certain trusts, or estates (not corporations or partnerships) • Shareholders must be U.S. citizens or residents (no nonresident aliens) Allocation rules : Unlike partnerships, S corporation income and deductions must be allocated in proportion to each shareholder's ownership percentage . You cannot create special allocations like you can with a partnership. Loss limitations: Shareholders can only deduct losses up to their basis in the S corporation stock plus any loans they've made to the corporation. Basis rules can be complex—consult a tax professional if you expect losses. To Elect S Corporation Status File Form 2553,Election by a Small Business Corporation with the IRS, signed by all shareholders. The election must generally be made by March 15 of the year you want it to take effect. Limited Liability Company (LLC) An LLC is a legal business structure under state law, but it's not a tax classification recognized by the IRS. How LLCs Are Taxed
LLCs have flexibility in how they are taxed. Default taxation (if no tax election is made):
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