An S-corporation can provide benefits to company owners by simplifying the taxation process. By passing tax liabilities and credits to shareholders, this type of business formation helps prevent double taxation experienced by C corporations. An S corporation may also purchase common stock as an investment strategy and sell the stock as required to maintain investment income.
S corporations may purchase common stock offered by limited liability partnerships, or LLPs, and limited liability companies, or LLCs, as well as stock owned by other S corporations. Because foreign shareholders and investors may purchase common stocks through an S corporation, they may also take advantage of the ability to derive income from corporate investments.
An S corporation may collect dividends realized from the ownership of common stock. These dividends may be used to fund continued business operations as approved by shareholders. The shareholders of an S corporation may also use losses realized from business operations to offset income from stock dividends. If shareholders realize losses in excess of dividends paid, they may use these losses to reduce individual tax liabilities.
Protection from Creditors
Forming an S corporation may help protect individual shareholders from creditors if the business fails or does not pay its debts as agreed. Under an S corporation formation, creditors may pursue the collection of business debts through the liquidation of stocks held by the corporation. In most cases, however, creditors cannot attach individual shareholders' assets, including stock dividends paid to shareholders and claimed as capital gains on the shareholders' personal tax returns.
Not every corporation qualifies for S corporation status. The corporation must be domiciled in the United States. Insurance companies, some banks and international sales corporations located in the United States typically may not be S corporations. An S corporation may have no more than 100 shareholders, and may issue only one class of stock.
- IRS: S Corporations
- S-Corporation: Small Business Start-up Kit; Daniel Sitarz
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