the two ways that a corporation can be classified by purpose are This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you What is an S Corporation? – All Up In Yo Business. Following along are instructions in the video below:
“Everyone welcome to episode 3 up all up in your business. I am aiden kramer kramer with the law office of aiden h kramer in colorado in this episode. I going to talk about s. Corporations.
And if you re a business owner or a potential business. Owner and if you ve spoken with a cpa. There s a possibility that your cpa or tax person. Has introduced the idea of electing to be an s corporation.
And while a lot of people have heard of s corporations. And may even be treated as an s corporation. I ve spoken with a lot of business people who don t really understand exactly what that means and i m how it affects their business. So in this episode.
I m hoping to explain it in a bit simpler terms so business owners can understand what the heck it means so. When you re forming a business as i discussed in episode. 1. You would choose a business entity and two of those business entities are corporations and llc s now some people say that there are two types of corporations c corporation.
And an s corporation. And that s not really the right way to say that there s a corporation can elect to be an s corporation. And whether you re a c corporation. Or an s corporation.
Is strictly a federal tax issue. It doesn t really affect what type of an entity..
You are in the eyes of the state or how your business is run really on a day to day basis. So whether you re a c corporation. Or an s corporation is strictly related to federal taxes. So if you form a corporation at the corporation defaults to be a c corporation s.
C s corporation. The name comes from the sub chapters of the federal tax code subchapter is where the guidelines ford s corporation comes from so that s why they re named c s. Corporations. So if you re a c corporation.
Which is the default what happens with the taxes is money comes into the business and it gets taxed at the corporate level. A corporation is a completely separate taxable entity. That has to pay its own taxes. So when the company makes money.
It has to be pay taxes on that money and then the money is distributed to the shareholders. And then the shareholders have to pay taxes on it as well so. What that s called is double taxation so c. Corporations.
Experience double taxation the money comes in and it s taxed. Twice as opposed to an llc where the llc is a pass through entity and the money comes in and it s taxed. Only once at the individual level of the business owners. So that llc is not its own separate taxable entity.
The money is taxed strictly to the business owners. So what happens..
When you elect to become an are to be treated as an s corporation. And the s corporation gets to avoid that double taxation. Let s see a corporation can elect to be an s corporation. By filling out.
I rs form 2 5. 5. 3. In case.
Anyone was wondering. But so the income and the losses to the corporation are taxed at the individual level of the shareholders. So the corporation s not paying that tax and then the shareholders are paying it it s going straight through to the shareholders and they can also deduct the losses from their personal taxes as well so you may be thinking well that sounds great why wouldn t every corporation just become an s corporation and avoid that double taxation well it s not that easy that irs gives strict guidelines for what types of corporations are eligible to be treated as s corporations. They are let s see that corporation must be a domestic corporation.
So it can t be it can t be a foreign corporation of another country. The shareholders have to all be either individuals or estates or trusts. I m not going to give in to that very much but partnerships and corporations can be shareholders of corporations. But with an s corporation all none of the shareholders can be partnerships or corporations.
So i hope that wasn t too confusing just remember that an s corporation. Can t have another corporation or another partnership as a shareholder. There have to be 100 or fewer shareholders and only one class of stock and there are a few types of businesses. That aren t eligible to be s corporations.
Some types of insurance companies and financial institutions. So if you re one of those you may want to look more into it if you re eligible um..
So i but generally if you meet those eligibility requirements. Then electing to be taxed as an s corporation can save the company a lot of money in taxes. So also an llc can elect to be taxed as an s corporation. As i mentioned typically an llc.
Only pays taxes once while the individuals pay the taxes basically and the money income and the losses has already passed through to the shareholders or to the owners of the llc. But what happens when you re an owner of an llc or any other business. You have to pay self employment taxes. When you re an employee of a business you get paid and some taxes are taken out.
But you don t have to pay any self employment taxes. But when you re actually the owner of the business. You have to pay those self employment taxes. Which are they go to social security and medicare.
I believe so the owners of the business have to pay that self employment tax. But when you elect to be treated as an s corporation. As an llc that that business owners get to take wages as employees from the company. So they pay income taxes on that money that they get paid as employees.
But they don t have to pay that self employment tax because they re being paid as employees and then any additional income that comes in is taxed as dividends so electing to be treated as an s corporation. Is a way to avoid paying that self employment tax. Now it would seem plausible then to say well i just won t pay myself any wages. I ll just take everything as dividends.
I won t have to pay any income taxes it ll just be taxed as dividends. But that irs says that businesses that are taxed or llc s that are taxed as s corporations..
That employees. The owner employees have to take reasonable wages. So you can t just not pay yourself anything and avoid paying that tax. All together you have to do a little bit of research and find out what someone in your position.
And your geographic area would make and you have to pay that to yourself as an employee of the business and then the additional income is dividends. So you know it is a way to save a bit by not having to pay that self employment tax. So that s just a pretty basic explanation of what it means to elect to be treated as an s corporation. There are a few there are a lot of other things to consider that i m not going to get fully into.
But so that if you are starting a business and you think maybe that s the right way to go or your business is growing you definitely need to off with a good tax person. A good cpa or tax attorney to find out if that s the right move for your business. And if it is then that s great because you re saving a lot of money in taxes. So.
If anyone has any questions about that or anything else feel free to ask and i ll try my best to answer them i m not a tax expert. I took one tax class in law school. And i did a little bit of research outside of that so i know some stuff. But i m certainly no tax expert.
But i ll try to answer any questions that i do get and as always if anybody has any other questions or if there are any topics that you would like me to cover or discuss in in more depth at please let me know and if you are in colorado. And want to speak with me personally about any business issues or estate planning feel free to contact me. I ll put my information at the bottom of this video right now and thank you very much for watching i look forward to seeing you ” ..
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