Business Planning - Subchapter S Corporations

A corporation is a legal entity created separate from the individuals who own it or the individuals who manage or operate it. The purpose of a corporation is to provide legal independence from the people who created it and to create and maintain personal liability protection for its shareholders and officers. If a corporation becomes insolvent or ceases to operate, shareholders normally only stand to lose their investment and officers will lose their jobs, but neither will be further liable for debts that remain owing to the corporation's creditors unless they have personally guaranteed those liabilities.

An S Corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S Corporations do not pay any income taxes but rather the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. Thus, S Corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S Corporations report the pass-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S Corporations to avoid double taxation on the corporate income. S Corporations are though responsible for tax on certain built-in gains and passive income.

Subchapter S Corporations remain popular entity choices for businesses in the State of Texas. As mentioned in the discussion of the LLC, certain businesses can not operate as an LLC and Subchapter S Corporations are viable alternatives. Again, we discuss each client’s needs specifically and help them to determine which entity is right for their situation.