is a pass-through type entity. That means
most of the income and deductions earned by the corporation is treated
as if it were earned by the shareholders.The sale of business assets
results in one level of taxation since generally the "S" corporation
pays no tax. (There is an exception for "S" corporations that were
converted from "C" Corporations.)
Proprietorships Compared S
All of the
business income of a sole proprietor reported on a Schedule
C is subject to self
If an "S" Corporation pays a shareholder no wages, the amount retained
is not subject to FICA taxes. Further, an "S" Corporation's
contribution to a qualified retirement plan for the
shareholder/employee is generally not subject to FICA taxes. A sole
proprietor's contributions to a KEOGH or SEP Plan are subject to self
employment tax. As long as the shareholder- employees of "S"
Corporations set their salaries at a low, but reasonable, level, the
balance could be considered a dividend payment, not subject to
Liability Companies Compared to "S" Corporations.
1. Limitation of
the LLC and the "S" Corporation provide similar limits on liability.
though an "S" Corporation and an LLC treated as a partnership are both
"pass-through entities", there are many restrictions that apply to an
"S" Corporation that do not apply to
LLCs. These "S" Corporation
restrictions include a limitation of 75 shareholders, the fact that
shareholders can only be individuals, estates, and some trusts, and
there can only be one class of stock. This greatly limits the "S"
Corporation as an entity for transferring interest between generations.
Other restrictions include prohibitions agreement. Corporation electing
"S" status if it is not a domestic corporation.
Limitation on "S" Corporation
Deductions. "S" Corporation
shareholders can deduct losses only
to the extent of their basis in stock plus the amount of any debt for
shareholder loans made to the "S" Corporation. (See IRC Section 1366).
Even if the "S" Corporation Shareholder personally guarantees the
corporation's debt, as is the typical creditor's requirement for most
newly formed "S" Corporations, losses cannot be deducted on that debt.
In contrast, LLC members are treated as partners for tax purposes and
obtain additional basis in their LLC membership interest for their
allocated share of LLC debts. This could result in increased deductions
for LLC members compared to "S" Corporation members.
Members. The LLC may
different tax treatment for foreign members
than a partnership/corporation in their home country. Also, foreign
business associates may not be familiar with the Limited Liability
Company as a business entity
J. Cappuccio, J.D.,
Chapel Avenue West, Suite 128
Hill, NJ 08002 USA
J. Cappuccio, J.D., LL.M.(Tax)