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S Corporation Explained

S Corporation

  • This is an election for corporations under section S of the tax code.
  • The S corporation has all of the legal characteristics of the corporation.
  • The exception is that S-Corp shareholders report corporate income or losses (commensurate with their ownership percentage) on their personal income tax returns.
  • Basically, the shareholders elect to be treated as a Pship for tax purposes, with a few outstanding differences.
  • The S-Corporation must file an information return, even though the entity itself does not pay taxes.

Limits on the S-Corp

o   No more than 100 shareholders.

o   Each shareholder must elect the pass-through taxation.

o   Only individuals can be members.

 

Limited Liability Organizations

 

Creation

o   Created through filing the articles of organization with the secretary of state.

o   Organizers form the entity (rather than incorporators).

o   The name LLC must be include dint eh name.

o   Foreign LLCs (LLCs from other states) must register with the state in order to carry on business within that state.

o   Must file an annual report in any state in which it operates.

 

Continuity

o   Owners of the LLC are known as members.

o   An LLC can have other entities as members.

o   Transfer of interest is restricted, or as defined in the operating agreement.

o   If a member dies or withdraws, the entity is dissolved unless the articles of incorporation state otherwise or the members agree to carry on business within 90 days of the occurrence.

 

Managerial Control

o   The members of the LLC control the LLC, unless the operating agreement establishes managers for the LLC.

o   In either case, the majority of member interest controls the LLC.

o   Like a partnership, the members of the LLC share profits and losses equally unless there is an agreement in place otherwise.

o   The minority members have the right to bring a derivative suit on behalf of the LLC or to sell his/her interest to the other members of the LLC.

 

Liability

o   Members act as agents of the LLC or Managers appointed by the members act as agents of the business.

o   These agents subject the LLC to potential liability, but the other LLC Members are not personally liable for the acts of the agent.

o   They may have liability to other LLC members for unauthorized acts.

 

Taxation

o   LLC are non-taxable entities, much like a partnership.

o   The taxable income flows through to the individuals.

o   The members report LLC income on their individual income tax statement.

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