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FAQ

How could I become a corporation? Not, "how do I incorporate", but rather, what combination of tax code, law, etc. might allow for me to (experimentally) register myself as a corporation? What would be the implications of doing so?

You must have read the Citizens United case. Humm…Unlike the other respondents, I think you can become a corporation, or at least be taxed that way, more or less. I assume you have your own business. That’s where the majority of your income comes from. It’s now a sole proprietorship, you file a schedule C with your tax return. So, you should form a single member LLC, and then file to be taxed as a C corp. Now you are a C corp for all tax purposes.You sill still have to file a 1040. You will still have to take a salary and pay taxes on it as an individual. But a large part of you is a corporation, in a round about sort of way.

How do I file for an S Corp?

What Is S-Corporation And How To Form OneS-Corporation is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S Corporation are not subject to double taxation.An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S Corporation. Generally, an S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S Corporation's shareholders include their share of the corporation's income or loss.S-Corporation vs. C-CorporationAdvantages:Like C-Corporations, S-Corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the shareholders of C corporations.Unlike C-Corporations, for Federal income tax purposes taxation of S corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level.Certain corporate penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation.Disadvantages:Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake).Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions.Unlike a C-Corporation, ownership of an S-Corporation is significantly restricted (read next).Who Can Form an S-Corporation?S-Corporations are more suitable for small and family businesses, and for those who start their business with small investment. Also, some existing businesses qualify for S-Corporation status.To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called " Election of S-Corporation Status") certain conditions must be met:S-Corporation cannot have more than 100 shareholders.All shareholders must be either U.S. citizens or residents, estates, or certain trusts.Can only have one class of stock. Preferred stock is not allowed.Profits and losses must be accorded to owners in proportion with their ownership stake.Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.Shareholders cannot deduct losses in excess of their investment.The corporation cannot deduct fringe benefits given to employees who own more than 2% of the corporation.Filing With IRS And The StateS-Corporation Election is filed with the IRS (Election by a Small Business Corporation, Form 2553), and that election is recognized by all states. with the exception of New York, New Jersey and Arkansas, which require additional state filing.S-Corporation AdvantagesForming S-Corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources.S-Corporation shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes.When you sell your S-Corporation, your taxable gain on the sale of the business can be less than it would have been had you operated the business as a regular corporation.Taxation of S-CorporationsAs already mentioned above, S-Corporations are not subject to corporate tax rates. Instead, S-Corporation passes-through profit (or net losses) to its shareholders and those profits are taxed at individual tax rates on each shareholder's Form 1040. The pass-through (sometimes called "flow-through") nature of the income means that the S-Corporation's profits are only taxed once - at the shareholder level. The IRS explains it this way: "On their tax returns, the S-Corporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss".S-Corporations therefore avoid the so-called "double taxation" of dividends in most states. There are however two exceptions to this rule:California: There is a franchise tax of 1.5% of net income of an S-Corporation (minimum $800). This is one factor to be taken into consideration when choosing between an LLC and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues, may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S-Corporation net income tax.New York City: S-Corporations are subject to the full corporate income tax at a 8.85% rate. However if the S-Corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.Retaining Profits of S-CorporationS-Corporations (much like regular C-Corporations) are allowed to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders, and as a result shareholders might be taxed on income they never received (whereas a shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).Converting S-Corporation Back to C-CorporationS-Corporation status is not permanent and can be reversed back if so desired. For example, if the business becomes more profitable and there are tax advantages to being a regular C-Corporation, S-Corporation registration status can be dropped after a certain amount of time.How To Form S-Corporation Online

How does a company go from an LLC to an S Corp?

In California you'd first file Certificate of Conversion with the Secretary of State along eith a $150 filing fee. Here’s the fotm with instructions.[1]Then you'd file a Form 2553 with the IRS electing S status. Here’s the instruction with link to form.[2]Once youve converted your entity to a corporation, you’ll need Bylaws, Minutes of a First Meeting, Stock, a Shareholder Agreement and a few other filings. You may want to have a lawyer do all if that.Footnotes[1] https://bpd.cdn.sos.ca.gov/corp/...[2] Instructions for Form 2553 (12/2017)

Tax Law: My current Company is a S-Corp.  Is it better to house my other companies/start ups under this same entity or have each be their own separate companies?

The answer depends upon what kind of companies you have, what they do, and where you are located. ( local law can have a tremendous impact on the structure chosen -- for example, California has a gross receipts tax on LLCs which can make them prohibitively expensive). This answer assumes you are in the U.S. and not in California.Holding real estate in an S-Corp is generally a very bad idea, on many fronts.  Dissolution of an S-Corp triggers a deemed sale which will trigger tax, even if all you are doing is returning the asset to the party that contributed it.  We'll assume there's no real estate involved.My suggestion would be to have each venture be established as an LLC, all owned by the same S Corp.  This would allow separation of liability to each, and yet retain a very simple structure that would be easily administered.We have a course on choice of business entities at Home - Certified Entrepreneurial Advisor .  It may be helpful in giving you the various positive and negative aspects to be considered. Regardless,  you should consult with a good accountant and attorney.

What return does an LLC has that is 100% owned by a S-corp file?

A sole-member LLC shareholder of an S-Corp is considered a disregarded entity. The S-Corp files the return with the activity of the LLC. The individual sole-member of the LLC is listed on the K1.If a single member limited liability company (LLC) owns stock in the corporation, and the LLC is treated as a disregarded entity for federal income tax purposes, enter the owner's name and address. The owner must be eligible to be an S corporation shareholder.Instructions for Form 2553 (12/2017)A multi-member LLC cannot be the shareholder or one of the shareholders of an S-Corp. Such an entity is ineligible to make the S-election. If such a situation arises after-the-fact, the S-Corp status is automatically revoked.To qualify for S corporation status, the corporation must meet the following requirements:Be a domestic corporationHave only allowable shareholders May be individuals, certain trusts, and estates and May not be partnerships, corporations or non-resident alien shareholdersHave no more than 100 shareholdersHave only one class of stockNot be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).S Corporations | Internal Revenue ServiceHowever, a multi-member LLC itself can elect to be treated as an S-Corp assuming it meets the other requirements using a form 2553. The LLC would not own the S-Corp; it would be the S-Corp. It would file an 1120S like any other S-Corp, and it would not be treated as partnership for tax purposes.Some states, such as New Jersey, require a separate state election in addition to the federal election to be treated as an S-Corp at the state level.

What is the best way to set up an S corporation in Maryland?

Set up a corporation. Here you can find the corporation checklist and resources - you can decide your way of incorporation. Checklist for Starting an S Corp (S Corporation)Understand S corporation election basics.  Here you can see S corproation must-know's:http://bzelf.com/s-corporation-s...And follow the instructions to make the S corporation electing with IRS/Federal through filing 2553: Filing Form 2553Maryland recgonize federal S corporation election. S Corporation State Recognition

What is a C Corp?

It's a corporation.The reason for that "C" is so that it's not confused with "S" corporation - they differ in ways of tax treatment in US.Below is the comparison for your reference, but for further guidance you are better off retaining a tax professional:S Corporation vs. C CorporationThe C corporation is the standard corporation, while the S corporation has elected a special tax status with the IRS. It gets its name because it is defined in Subchapter S of the Internal Revenue Code. To elect S corporation status when forming a corporation, Form 2553 must be filed with the IRS and all S corporation guidelines met. But C corporations and S corporations share many qualities:Limited liability protection. Both offer limited liability protection, so shareholders (owners) are typically not personally responsible for business debts and liabilities.Separate entities. Both the S corp and C corp are separate legal entities created by a state filing. Filing documents. Formation documents must be filed with the state. These documents, typically called the Articles of Incorporation or Certificate of Incorporation, are the same for both C and S corporations.Structure. Both have shareholders, directors and officers. Shareholders are the owners of the company and elect the board of directors, who in turn oversee and direct corporation affairs and decision-making but are not responsible for day-to-day operations. The directors elect the officers to manage daily business affairs.Corporate formalities. Both are required to follow the same internal and external corporate formalities and obligations, such as adopting bylaws, issuing stock, holding shareholder and director meetings, filing annual reports, and paying annual fees.S corporation vs. C corporation: The differencesDespite their many similarities, S corporations and C corporations also have distinct differences.Taxation. Taxation is often considered the most significant difference for small business owners when evaluating S corporations vs. C corporations.C corporations. C corps are separately taxable entities. They file a corporate tax return (Form 1120) and pay taxes at the corporate level. They also face the possibility of double taxation if corporate income is distributed to business owners as dividends, which are considered personal income. Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.S corporations. S corps are pass-through tax entities. They file an informational federal return (Form 1120S), but no income tax is paid at the corporate level. The profits/losses of the business are instead “passed-through” the business and reported on the owners’ personal tax returns. Any tax due is paid at the individual level by the owners.Personal Income Taxes. With both types of corporations, personal income tax is due both on any salary drawn from the corporation and from any dividends received from the corporation.Corporate ownership. C corporations have no restrictions on ownership, but S corporations do. S corps are restricted to no more than 100 shareholders, and shareholders must be US citizens/residents. S corporations cannot be owned by C corporations, other S corporations, LLCs, partnerships or many trusts. Also, S corporations can have only one class of stock (disregarding voting rights), while C corporations can have multiple classes. C corporations therefore provide a little more flexibility when starting a business if you plan to grow, expand the ownership or sell your corporation.S corporation (S corp) electionTo become an S corporation, you must file Form 2553 with the IRS. The IRS instructions—which can be a bit tough to follow—require that an election is considered effective in the current tax year only if the Form 2553 is completed and filed:Any time before the 16th day of the 3rd month (for calendar year tax payers, this means it needs to happen by March 15th)Any time during the preceding tax year (however, an election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2½ months long is treated as timely for that year).Generally, an election made after the 15th day of the 3rd month but before the end of the tax year is effective for the next tax year (unless you can show failure to file on time was due to reasonable cause).Keep in mind that some states also require you to file a state-level S corporation election after incorporating your business.

How do S corps work regarding taxation?

A2A.First of all, you do not “incorporate an LLC into a S-corporation”. If you own an LLC, and you elect to be treated as an S-corporation for tax purposes, you file IRS Form 2553, Election by a Small Business Corporation. If you file by the 15th day of the third month of your tax year (March 15 for an LLC operating on a calendar year basis), the election becomes effective in that year, otherwise the election becomes effective during the next year. Note that an LLC cannot elect S-corporation treatment unless all owners are US citizens.Once the election to be treated as an S-corporation becomes effective, the company files a corporate tax return, IRS Form 1120S, U.S. Income Tax Return for an S Corporation. This return is filed using the corporate name and EIN. As part of the filing of Form 1120S, the company will create a Schedule K-1 for each owner that shows that owner’s share of the corporation's income and expenses. The K-1 will contain the Social Security number of each owner, and a copy of each K-1 is included in the 1120S. The LLC doesn't pay any taxes itself; Form 1120S is an information return only.Each owner reports the information from Schedule K-1 on his or her individual tax return, according to the Shareholder Instructions that are provided with Schedule K-1, The owners are responsible for the taxes on their distributive share of the LLC’s income, regardless of whether they receive a cash distribution or leave it in the company as retained earnings. The owners can deduct losses only to the extent that the loss doesn't exceed their basis in the company (where the basis is generally the amount of capital invested, adjusted for retained earnings and prior losses).Any owner that performs services for a company that elects S-corporation treatment must be paid a salary (with payroll taxes deducted and paid to the IRS during the year) that is reasonable for the services provided -usually this should be what you would have to pay an outsider to do the same thing, although there is some flexibility. The intent is to ensure that income intended as compensation for services is taxed appropriately as compensation rather than being shielded in the form of a (usually) non-taxable distribution.As Andrew Weill notes, this isn't a decision that you should be making without a thorough understanding of the implications, and I strongly suggest that you engage a qualified professional who can advise you how to proceed.

My former cofounder wants our company to make an S-corp election, what are the ramifications to my taxes?

You are taxed on your share of the corporation's profits, if any, whether that income is distributed to you or not. You will receive a Schedule K-1 each year that shows your share of the S-corporation's income, along with a set of instructions that tell you how to report the income on your own tax return. Generally, ordinary business income from the S-corporation is reported on Schedule E, while other income from the business (interests, dividends, etc.) is reported in the places you might expect on the 1040. Losses may or may not be deductible, depending on whether or not they exceed your stock basis in the company.If you are holding stock in the company at the time of the S-corporation election (the day before the effective date), you must consent to the election in order for it to be valid. You will have to sign and date either the Form 2553 that the company submits to make the election, or a separate consent form.Distributions affect your stock basis in the corporation. You have to be careful with distributions, because if you receive a distribution that is greater than your stock basis in the company you will have a capital gain and will be taxed on it. Any amount of your net income that is not distributed to you in any given year - including any tax-exempt income the company earns - increases your stock basis. You need to keep track of your basis; don't count on the company to do it for you. The Schedule K-1 instructions, http://www.irs.gov/pub/irs-pdf/i..., contain a worksheet that you can use to calculate your basis each year. That should give you a pretty good idea of whether or not you want to take a distribution.
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