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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.
As an s-corp, do you get taxed on federal tax, plus the self-employment tax? Or just self employment
No, No, and No.First, please understand, there is no such thing as an S Corp.You will actually be either one of two things:1.) A C Corporation that has filed Form 2553 with the IRS electing Subchapter S status, or2.) A Limited Liability Company (LLC) that has filed Form 8832 electing to be treated for tax purposes as a corporation, and then electing Subchapter S status with Form 2553.I will assume that you have an LLC and have elected to be taxed as an S Corp.If so, you will file Form 1120S, which is a corporate tax return for an entity, either a corporation or an LLC, which has elected Sub S status.On Form 1120S you report all of your income, and all of your expenses, and the result is your taxable income.This income is not divided into parts. It is all corporate income.But there is no tax due with the Form 1120S.For Subchapter S entities, the income and allocations drop through to the members/shareholders, and the amounts are reported on Schedule K-1 (Form 1120S) and sent to the individuals, who report these amounts on their Form 1040.This income is not considered Self-Employment income, and no self-employment tax is due.The Form 1120S and copies of the Schedules K-1 are sent to the IRS.If the member or shareholder is an employee of the entity, the entity will pay the member or shareholder, and send a W-2 to the member or shareholder, and will withhold Social Security taxes (the equivalent of self-employment taxes for the individual).A member or shareholder may or may not be obligated to pay himself a salary. It’s a complicated and fairly vague requirement/suggestion and depends on the facts of the particular business, and only really ever comes up in the event of an audit that is happening for some other reason. The IRS is not in the business of monitoring “reasonable compensation.” It’s a matter of opinion anyway, and they prefer to stick with numbers.I hope this helps. It is not legal or financial advice, just sharing some thoughts based on experience.Business entities are very interesting to me, so I tend to go on.Good Luck.Michael Lantrip, “How To Do A Section 1031 Like Kind Exchange”
In an S corporation study, how do you understand the "At risk amount" calculation?
You are referring to form 1120S and the calculation of "at risk" for determination of "basis" for the deductibility of losses from the 1120s on the individuals 1040.Non-recourse loans do not get added into basis for deductibility of lossesRecourse loans do.Individual shareholders can not deduct losses in excess of basisThe difference between the two is basically are you personally liable for the debt should the S corp go under.
When dissolving an LLC do you need to fill out IRS Form 966?
The answer will be yes or no depending on how your entity is recognized for tax purposes. An LLC is not a recognized entity by the IRS. By default, a single-member LLC is organized for tax purposes as a sole proprietorship and a partnership for tax purposes if there is more than one member. However, you can make an election to be taxed as a C Corporation (i.e., an LLC for legal purposes that is taxed as a C Corporation for tax purposes).You must complete and file form 966 to dissolve your LLC if you have elected to be a C Corporation or a Cooperative (Coop) for tax purposes. S Corporations and tax-exempt non-profits are exempt from filing this form (see here).If you are organized for tax purposes as an S Corporation you would file your taxes via form 1120S for the last time and check the box indicating that your return is a “Final Return.” Same is true for a Partnership, but with form 1065.On a state and local level, best practice is to check with your state and local agencies for requirements.For digestible information and tools for understanding how the tax landscape affects your business, visit Financial Telepathy
What is the best way to incorporate a startup?
Different entity options to register a business in India, starting from advantages to regulations to costs are detailed out. Majorly, there are 5 types of entities that can be registered while starting up a new business, these are defined in Companies Act, 2013:Sole ProprietorshipPartnership FirmOne Person CompanyLimited Liability PartnershipPrivate Limited CompanySole ProprietorshipA sole proprietorship is a business that is owned and managed by a single person. It is very popular among the unorganized sector, particularly small traders and merchants. There is no such thing called registration, Proprietorship recognized by other registration. Liability of the proprietor is unlimited and the firm cannot have continuous existence. It should ideally only be considered by small merchants and tradersImportant registrations:Professional Tax RegistrationGST RegistrationPartnership Firm A simple partnership firm is similar to sole proprietorship for all practical purposes. A partnership firm also requires all the registrations required by sole proprietorship firms. Partnership firms can be either registered with the registrar or remain unregistered. A pan card has to be obtained from the firm and the liability of the partners is unlimited whereas the firm cannot have continuous existence. Important registrations:Professional Tax RegistrationGST RegistrationOne Person Company (OPC) OPC is a recently introduced improvement on sole proprietorship firm registration. This gives the promoter an invaluable advantage of limited liability & the company can have continuous existence. OPC has to be incorporated through Ministry of Corporate Affairs. Not even an audited annual returns need to be submitted to MCA. The company can nominate any other person as a director without executive powers. The service charge for this service ranges from Rs. 5000/- to Rs 12000/-Limited Liability Partnership (LLP) LLP introduced in 2022. which is an improvement over the general partnership. This gives promoters an invaluable advantage of limited liability & the company can have continuous existence. The company has to be incorporated through Ministry of Corporate Affairs. Not even an audited annual returns need to be submitted to MCA. The service charge for this service ranges from Rs. 6000/- to Rs 14000/-Private Limited Company It is the most popular legal structure for business and allows outside funding and also employee stock options. More stringent compliance measures to be followed, hence more credibility. The company needs to appoint an auditor and the audited financial statements are to be submitted to MCA annually. The company is eligible to issue debentures and convertible debentures. The service charge ranges from Rs.7000/- to Rs.15500/-Company incorporation is streamlined with the introduction of INC-29:From May-2015, company incorporation can be divided into 2 broad stepsObtaining Digital Signature CertificatePreparing and submitting INC-29Government Fees for various types of companiesOne Person Company Rs.6850/-Limited Liability Partnership Rs.3167/-Private Limited Company Rs.7800/-Documents Required for INC-29Director Identification Number (DIN)Memorandum of Association (MOA)Articles of Association (AOA)Affidavit and declaration by first Subscribers and Directors.Proof for Registered Office Address. Rental Agreement / Sale Deed.Copies of a utility bill of the registered office address that are not older than 2 months.If the proposed company name is a filed or registered trademark, then NOC from the trademark applicant or owner must be attached.Start-up process entails complex procedures and many bureaucratic hurdles, entrepreneurs are better off using professional services. Hiring a virtual lawyer and virtual accountant can save time and help ensure that the process goes smoothly. For any Legal and Accounting support, Happy to help you, let us talk!
Incorporation: How should you structure your startup?
The best answer is; it depends. I hate to be that person, but in all seriousness, the best legal entity will be determined by the nature and vision you have for your startup. Unfortunately, this may require hiring a lawyer, which is not exactly what a new startup wants to hear.The reason I immediately suggest hiring a lawyer is because there are differences between the two entities which may have varying effects on your company that you may not desire. Foreseeing these potential issues is not the easiest task, and mistakes can be made even with some detailed research. A lawyer who has worked with startups in the past and has business law experience will be able to give you sound guidance that could end up saving you a lot of time and money.Aside from this point, I can at least give you a brief explanation of each entity and what the implications of each. I will stress that these are extremely brief explanations, so don't take them as a complete/thorough lesson.A C-Corporation is a standard corporation while an S-Corporation has a special tax status assigned to it by the IRS. The term “S” corporation comes from its definition in Subchapter S of the Internal Revenue Code. Both types of corporations offer limited liability protection, have similar structures, corporate formalities, and they are both considered separate entities. However, despite their similarities, they have some pretty distinct differences. The biggest difference is how the corporations are each taxed.C-Corporations are separate taxable entities, and are subject to double taxation. This means that the corporation itself pays taxes, and any dividends paid to the shareholders is treated as personal income and thus subject to additional taxation at the individual level. Conversely, S-Corporations are pass-through entities, and as such are not subject to double taxation. They pay no corporate income tax (although they file form 1120S) and the profit and losses of the business are passed-through onto the stockholders and taxes are paid at the individual level.See also: Should a tech startup incorporate as an LLC, a C-Corp, or an S-Corp? If so, why?Another difference between the two is the C-Corporations have no ownership restrictions, whereas S-Corporations do. S-Corporation restrictions include no more than 100 shareholders and they must be U.S. citizens or residents. They can also not be owned by other corporations, LLC’s, or partnerships. Finally, S-Corporations can only have one class of stock while a C-Corporation can have multiple classes.LLC's are great if you want that liability protection without all the formality and paperwork. It’s very easy and cheap to set up. There are also some publication requirements in most states. But if you're looking to raise capital from professional investors this might not be the best structure. More on that here: Why can't (or won't) outside investors fund an LLC?There are a few more differences but these are the primary ones that impact most people. Given the restrictions that come along with an S-Corporation, a C-Corporation offers a little bit more flexibility when starting a business. This especially holds true if you plan on growing the business or raising large amounts of money or want to have preferred shareholders.Like I said earlier, the best bet is to at least consult with a lawyer to see what your best options are. You should take a look at our site, LawTrades. We are currently helping hundreds of startups find attorneys that can best help them with situations such as this. I have founded two separate startups, and I completely understand how difficult and stressful the beginning stages are. But hiring a lawyer can not only help your company grow and succeed, it also gives you so assurance moving forward that nothing was overlooked.I hope this answer helps! Please don't hesitate to reach out if there is anything I can help you with. I am always eager to give a lending hand to a fellow startup company. Best of Luck!
I've read that to avoid double taxation of my real estate investing income, I need to have a S Corporation instead of a C Corporation. But when I research it, everything is just about corporations. What am I missing?
It is easy to understand the confusion.There is actually only one type of Corporation: a C Corporation.An “S Corporation” is more accurately described as a Subchapter S Corporation, also referred to as a Sub S or an S Corp.First you must have a C Corporation. Then you can file IRS Form 2553 Election By Small Business Corporation.This Form 2553 tells the IRS that your C Corporation is electing to be taxed under the provisions of Subchapter S of the Internal Revenue Code.This means that the income of the C Corporation will not be taxed at the corporate level, but will drop down to the shareholders, who will report their share of the income and pay the tax on it.A C Corporation files a Form 1120 income tax return.An S Corporation files a Form 1120S income tax return. It will include a Schedule K-1 for each shareholder, reporting that shareholder’s portion of the income and credits. The shareholder attaches the Schedule K-1 to his Form 1040 tax return.You cannot file an S Corporation.You file a C Corporation, and then you make the 2553 election to be treated as a Subchapter S Corporation.There are certain requirements to be met in order to be able to file the 2553.I hope this helps.Michael Lantrip, Attorney | Accountant | InvestorAmazon.com: Michael Lantrip: Books, Biography, Blog, Audiobooks, Kindle
Would it be better if there was no Federal income tax and we had a higher Federal corporate tax?
I don’t know how to answer this question because I don’t know what the asker means by “better”.In 2022 (the most recent year for which the IRS is providing tax statistics), approximately 4.2 million S corporations filed Form 1120S, reporting a total net income of approximately $380 billion. All of that was taxed, if it was taxed at all, as personal income tax. Only 1.5 million C corporations filed Form 1120 in 2022. reporting total net taxable income of about $1.1T and total taxes of $266B.Presumably, if we were to eliminate the personal income tax entirely, we’d also eliminate the passthrough tax treatment of S corporations, making the income from S corporations subject to the same taxes as C corporations. This would mean that the tax base on which corporate taxes would be assessed would increase from $1.1T to about $1.6T.The total income tax, before credits, assessed on personal returns in 2022 was about $1.2T.In order to maintain revenue parity, we’d have to collect $1.45T in taxes on $1.6T in corporate income. That’s an average tax rate of 90%, well over triple the current average tax rate of about 24%. Note that most federal corporate tax brackets have marginal rates that exceed 33%, and thus tripling these rates would result in them exceeding 100%. Marginal tax rates that equal or exceed 100% are a very strong disincentive to generating a profit.If you thought US corporations tried hard to shelter their income from corporate income tax now, you should see the shenanigans they’d invent to avoid a tripled tax rate.The only way this idea would be “better” is if you think it’s in the interest of the United States to cut federal tax revenues by at least 60%. At this level, it’s possible that corporations would not completely flee the US entirely to avoid such aggressive taxation policies.Note that I haven’t considered other business structures that also result in passthrough taxation, the most significant of which here would be LLCs and partnerships. Partnerships (and multi-member LLCs which elect to be treated as partnerships for tax purposes) show up as Schedule E income on individual taxpayer returns, the same place that S corps (and LLCs that elect to be treated as a S corp) do. Single member LLCs instead show up as Schedule C self-employment income, the same place that sole-proprietor businesses do. In 2022. total Schedule E income from partnerships, multi-member LLCs, and S corporations was $573B, and total Schedule C income from self-employment and single-member disregarded LLCs was $240B. That’s $813B total, only $380B of which is attributable to S corps. That’s another $433B in currently-taxable business income that is not due to any corporation.Does the proposer intend for this noncorporate business income to be taxed on the same terms as corporations, or does the person asking this question simply not understand that not every profit-making business in the United States is a corporation?(Tax statistics obtained from Tax Statistics.)
How long does it take to convert from an LLC to a C or S Corp? Also how much would it cost?
If you have an existing LLC you can convert to an S-Corp by completing IRS Form 2553. This form can be faxed or emailed to the IRS. It will usually take 6–8 weeks to get a confirmation letter back from the IRS. You are not officially an S-Corp until you receive the confirmation letter. You should save your fax receipt or send the form by certified mail with return receipt requested so you have proof of filing with the IRS.There are strict timelines for filing Form 2553. Here are the due dates quoted from the IRS website:Complete and file Form 2553:No more than two months and 15 days after the beginning of the tax year the election is to take effect, orAt any time during the tax year preceding the tax year it is to take effect.For this purpose, the 2-month period begins on the day of the month the tax year begins and ends with the close of the day before the numerically corresponding day of the second calendar month following that month. If there is no corresponding day, use the close of the last day of the calendar month.Newly formed corporations and LLC’s can file the form anytime during the year if they have just been incorporated/organized.Late S-Corp elections are often permitted if an explanation is included on Form 2553 however this is at the discretion of the IRS.Converting an LLC to a C-Corp is slightly more complicated. To do this you would need to file and submit Form 8832 (Entity Classification Form). If the LLC has previously submitted this form there is a chance the IRS will deny your request. The timeline for this process can vary from one company to the next.I hope this helps you.
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