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S corporation status may be available in certain situations, depending on the number and identity of the shareholders and their willingness to accept a relatively simple capital structure. Conducting business in the form of an S corporation avoids the problem of double taxation, since an S corporation is treated as a conduit entity in much the same way as partnerships. Therefore, an S corporation combines many of the best features of both a partnership and a corporation from a tax perspective. Limited liability is achieved through the corporate form, and the double tax of the corporate form is eliminated.

Operating the business in the form of an S corporation can be beneficial for family owned businesses. S corporations are ideal for spreading income among inactive family members, while avoiding many of the tax, legal, and operating problems that are experienced by family partnerships. The S corporation may also be a good choice during the early years of the entity when losses are expected. The losses may be used by shareholders to offset their other income, subject to the passive loss limitation imposed on inactive members.

S corporations also have certain disadvantages. The need to adopt a simple capital structure has already been mentioned, and the transferability of ownership interests will be limited by the need to insure that all shareholders satisfy the requirements listed in the Internal Revenue Code. Another disadvantage to S corporations is that the deductibility of certain fringe benefits is limited. Medical reimbursements, disability retirement benefits, premiums on group term life insurance, and cafeteria plans paid to a stockholder holding a 2% or greater interest in the corporation are taxable to the shareholder but not deductible by the corporation. Also, there are differences in the tax treatment of distributions to the shareholders of an S corporation that may result in the recognition of gain, where a similar distribution to partners of a partnership would not be a taxable event. Finally, an S corporation’s income is taxed to the shareholders regardless of whether the corporation distributes funds to the shareholders for use in paying the tax liability.

San Diego Business Lawyer and Contracts Attorney providing a first class “one stop shop” for all your business, contract, will, tax and estate planning legal needs. Contact us today: (619) 400-4942.

Contact Kehr Law today
Phone: (619) 400-4942
Text Message: (619) 823-8230
Email: dan@kehrlaw.com