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What Is an S Corp?

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What Is an S Corp?

What Is an S Corporation (S Corp)?

An S corp or S corporation is a business structure that is permitted under the tax code to pass its taxable income, credits, deductions, and losses directly to its shareholders. That gives it certain advantages over the more common C corp, The S corp is available only to small businesses with 100 or fewer shareholders, and is an alternative to the limited liability company (LLC).

Both S corps and LLCs are known as “pass-through entities” because they pay no corporate taxes but instead pay their shareholders, who are responsible for the taxes due.

KEY TAKEAWAYS

  • An S corporation or S corp, also known as an S subchapter, is one type of legal business structure common among small business. A limited liability company (LLC) is another.
  • Requirements of an S corp give a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. 
  • Both S corps and LLCs are pass-through entities, meaning that they don’t pay corporate taxes, and both offer limited liability protection for their owners/principals. However, LLCs are more flexible.
  • S corporation shareholders must be individuals, specific trusts and estates, or certain tax-exempt organizations. LLCs aren’t subject to the same Internal Revenue Service (IRS) rules governing the number and type of members, who are typically sole proprietors or small groups of professionals.

Understanding an S Corporation (S Corp)

S corporations get their name from Subchapter S of the Internal Revenue Code, under which they’ve elected to be taxed. The key characteristic of a corporation filed under Subchapter S: It may pass business income, losses, deductions, and credits directly to shareholders, without paying any federal corporate tax—making it something known as a pass-through entity. This gives it some special tax benefits under 2017’s Tax Cuts and Jobs Act. However, it is liable on the corporate level for taxes on specific built-in gains and passive income.1

Aside from its tax status, an S corp is similar to any other corporation, or C corporation as they’re officially known. It’s a for-profit company, incorporated under and governed by the same state corporation laws. It offers similar liability protection, ownership, and management advantages as a C corporation. It must also observe internal practices and formalities: Have a board of directors, write corporate bylaws, conduct shareholders’ meetings, and keep minutes of significant company meetings.

The main difference between an S corp and a C corp is how each is taxed: Profits from a C corp are taxed to the corporation when earned, then taxed to the shareholders when distributed as dividends, creating a double tax. An S corp may pass income directly to shareholders without having to pay federal corporate taxes.

IRS Requirements for an S Corp

To qualify for S corporation status, a business has to meet certain Internal Revenue Service (IRS) requirements. It has to be incorporated domestically (within the United States), have only one class of stock, and not have more than 100 shareholders. In addition, those shareholders must meet certain eligibility requirements, which means that they must be individuals, specific trusts and estates, or certain tax-exempt organizations [501(c)(3)]. Partnerships, corporations, and nonresident aliens cannot qualify as eligible shareholders.1

S corp shareholders report income, gains, and losses from the corporation on their individual tax returns, and they pay taxes at their ordinary income tax rates. Since the money comes to them free of corporate tax, they avoid double taxation on any income or earnings from the corporation.

How to Set up an S Corp

To create an S corporation, a business must first be incorporated.

It then must file Form 2553 with the IRS. Known officially as Election by a Small Business Corporation, the form states that the IRS will accept the S corp status only if the business meets all the qualifications for the status, “all shareholders have signed the consent statement, an officer has signed below, and the exact name and address of the corporation (entity) and other required form information have been provided.”2

Advantages and Disadvantages of S Corporations

Advantages of Registering as an S Corp

  • The big advantage is the tax benefit: not having to pay federal taxes at the entity level.1 Saving money on corporate taxes is beneficial, especially when a business is in its early years.
  • S corp status can lower the personal income tax tab for the business owners as well. By characterizing money they receive from the business as salary or dividends, S corp owners often lower their liability for self-employment tax. The S corp status generates deductions for business expenses and wages paid to their employees. There are also tax benefits for pass-through entities that apply to S corp owners.
  • S corp shareholders can be company employees, earn salaries, and receive corporate dividends that are tax free if the distribution does not exceed their stock basis. If dividends exceed a shareholder’s stock basis, the excess is taxed as capital gains—but these are taxed at a lower rate than ordinary income.
  • Other advantages include being able to transfer interests or adjust property basis without facing adverse tax consequences or having to comply with complex accounting rules.
  • S corporation status may help establish credibility with potential customers, employees, suppliers, and investors by showing the owner’s formal commitment to the company.

Disadvantages of Registering as an S Corp

  • Because S corporations can disguise salaries as corporate distributions to avoid paying payroll taxes, the IRS scrutinizes how S corps pay their employees. An S corporation must pay reasonable salaries to shareholder-employees for services rendered before any distributions are made.
  • When it comes to making those distributions to stakeholders, the S corp must allocate profits and losses based strictly on the percentage of ownership or number of shares that each individual holds.3
  • On rare occasions, the IRS may terminate an S corp’s Subchapter S status if an S corp either doesn’t properly allocate profits and losses or makes any other noncompliance moves, such as mistakes in an election, consent, notification, stock ownership, or filing requirement. However, a quick rectification of noncompliance errors can usually avert any adverse consequences.
  • The business of setting up an S corp requires time and money. The business owner must submit articles of incorporation with the Secretary of State in the state where their company is based. The corporation must obtain a registered agent for the business and pay other fees associated with incorporating itself.
  • In many states, owners pay annual report fees, a franchise tax, and other miscellaneous fees. However, the charges are typically inexpensive and may be deducted as a cost of doing business. Also, all investors receive dividend and distribution rights, regardless of whether the investors have voting rights.
  • The limits on the number and nature of shareholders might prove onerous for a business that’s growing rapidly and wants to attract venture capital or institutional investors.

Pros

  • Tax benefits: no or lesser corporate and self-employment tax for owner, no double taxation for shareholders
  • Protections of incorporation: limited liability, transfer of interests
  • Prestige, credibility

Cons

  • Costs of incorporation
  • Complex compliance rules
  • Potentially growth-inhibiting qualifications to maintain status

S Corp vs. LLC

limited liability company (LLC) is another type of legal business entity. Like the S corp, it’s a common go-to structure for small businesses.

LLCs and S corps share other characteristics as well. Both are pass-through entities, meaning that they don’t pay corporate taxes, and both offer limited liability protection for their owners/principals, meaning that the owners’ personal assets can’t be touched by business creditors, nor can they be held personally responsible in lawsuits filed against the company. As a pass-through entity, LLC owners also have tax benefits under the Tax Cuts and Jobs Act, just as S corp owners do.

However, LLCs are more flexible than S corps. They aren’t subject to the IRS regulations concerning the number and type of shareholders/owners (called “members”) or to other federal or state rules regarding governance, procedure, and distribution of funds. They can allocate their profits and losses in whatever proportions the owners desire.3

Easier to establish than S corps, LLCs typically are formed by sole proprietors or small groups of professionals, like attorneys, doctors, or accountants. However, their financing options are more limited—generally, to bank loans, as opposed to equity investors. This can limit their potential for growth.

U.S. Income Tax Return for an S Corporation

Although they are largely exempt from corporate taxes, S corporations must still report their earnings to the federal government and file tax returns.

Form 1120-S is essentially an S corp’s tax return. Often accompanied by a Schedule K-1, which delineates the percentage of company shares owned by each individual shareholder, Form 1120-S reports the income, losses, dividends, and other distributions that the corporation has passed onto its shareholders.45

Unlike C corps, which must file quarterly, S corps only file once a year, like individual taxpayers. Form 1120-S is simpler than tax forms for C corporations, too. The version for 2021 ran five pages.5

As long as a company elects S corporation status (and the IRS has accepted that election), it must file Form 1120-S. The form is due by the 15th day of the third month after the end of its fiscal year—generally, March 15 for companies that follow a calendar year.

Like individuals, S corporations can request a six-month extension to file their tax returns. To do so, they must file Form 7004: Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns by their return’s regular due date.6

Why would you choose an S corporation (S corp)?

S corporations can be the best of both worlds for a small business, combining the benefits of corporations with the tax advantages of partnerships.

Specifically, S corporations offer the limited liability protection of the corporate structure—meaning that an owner’s personal assets can’t be accessed by business creditors or legal claims against the company. But like partnerships, they don’t pay corporate taxes on any earnings and income that they generate. They can also help owners avoid self-employment tax, if their compensation is structured as a salary or a stock dividend.

What does S corporation stand for?

An S corporation is named for Subchapter S of Chapter 1 of the Internal Revenue Code (IRC). It is taxed under this provision of the IRC. S corps are also known as S subchapters.

How does an S corp work?

In many ways, an S corp works as any corporation does. Operating under its home state’s corporation statutes, it establishes a board of directors and corporate officers, bylaws, and a management structure. It issues shares of company stock. Its owners cannot be held personally or financially liable for claims by creditors or against the company.

S corps are distinguished by the fact that they are not federally taxed on most of the earnings that they generate and distribute, leaving more money to pass to shareholders (who do pay taxes on the funds, at their ordinary income rates). The funds must be allocated strictly based on the shareholders’ equity stake or number of shares.

S corps must restrict their number of shareholders to 100 or less, and these must all be individuals, nonprofits, or trusts. These stockholders, along with the corporation itself, must be U.S.-based.

Come tax time, S corps must distribute the Schedule K-1 form to shareholders, indicating their annual profits or losses from the company, and file Form 1120-S with the Internal Revenue Service (IRS).

Which is better, a limited liability company (LLC) or an S corp?

Whether a limited liability company (LLC) or an S corp is better depends on the size and nature of the business and its aspirations for growth.

An LLC tends to be preferable for sole proprietors or enterprises with just a few partners, due to its flexibility and ease of establishment. If a business is larger—or aspires to be—then an S corp might work better. S corps have more financing options: Unlike LLCs, they are allowed to offer equity stakes to investors in return for capital, for example. And if their operations are complex, they would benefit from establishing the formal structures, compliance procedures, and other protocols required of corporations.

What is the difference between an S corp and a C corporation (C corp)?

One key difference between S corps and C corporations (C corps) can be expressed in one word: taxes. In a nutshell, C corps pay them and S corps don’t (mostly).

C corps pay corporate taxes on their earnings, the way individuals pay income taxes. (In the U.S., corporations are currently taxed at a flat rate of 21%.) Any dividends or other profits are then distributed to shareholders with after-tax funds. S corps, by contrast, are exempt from federal tax on most earnings—there are a few exceptions on certain capital gains and passive income—so they can distribute more gains to stockholders.

In return for this tax benefit, S corps face certain IRS-mandated restrictions. They and their shareholders must be domestically based. They can have no more than 100 shareholders, whose ranks are limited to individuals, nonprofits, trusts, and estates—no institutional investors, in other words. And they can issue only one class of stock.

C corps do not have to comply with any of these restrictions. Generally (though not always), an S corp is smaller than a C corp.

The Bottom Line

S corporations are a common type of legal entity recommended for small businesses. They carry the tax advantages of partnerships while providing the limited liability protections of corporations. Sort of a “corporate lite” structure, they are easy to establish and simpler to maintain than regular C corporations.

S corps require many of the protocols and incur many of the costs associated with regular corporations—starting with the fees and formalities associated with incorporation. They are definitely more expensive to establish and time consuming to maintain than LLCs, another popular small-business structure.

Though advantageous for fast-growing firms, they are also subject to certain restrictions on their size and shareholders by the IRS, which could eventually inhibit their expansion. The good news is that it’s relatively easy for an S corp to change to C corp status, should business conditions prove favorable to do so.

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Investing in Digital Yuan: A New Era of Currency

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Investing in Digital Yuan: A New Era of Currency

The digital yuan, also known as e-CNY or DCEP (Digital Currency Electronic Payment), is the digital version of China’s currency, the Renminbi (RMB). The digital yuan is being developed by the People’s Bank of China (PBOC) and is seen as a major step towards a more digital and cashless society. The digital yuan is currently in trial phase and has been piloted in several cities across China, with the goal of a nationwide roll-out in the near future.

Why Invest in Digital Yuan?

  1. Growing Adoption: As the world moves towards a cashless society, the digital yuan is poised to become a major player in the digital currency market. With a population of over 1.4 billion, the adoption of the digital yuan has the potential to be huge, making it an attractive investment opportunity.
  2. Backed by the Chinese Government: The digital yuan is being developed and backed by the PBOC, which is the central bank of China. This provides a level of security and stability for investors, as the government is committed to ensuring its success.
  3. Increased Efficiency: The digital yuan is designed to be faster and more efficient than traditional currency. Transactions can be completed quickly and securely, without the need for intermediaries like banks. This could potentially lead to lower transaction fees, making the digital yuan a more attractive option for consumers and businesses.
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Risks of Investing in Digital Yuan

  1. Regulation: The digital yuan is a relatively new technology and is still in the trial phase. As such, there are many uncertainties surrounding its regulation, which could potentially impact its value.
  2. Competition: The digital yuan is not the only digital currency on the market and will face competition from other digital currencies, such as Bitcoin and Ethereum. This competition could potentially impact its adoption and success.
  3. Security: As with any digital currency, the digital yuan is vulnerable to hacking and cyberattacks. This could potentially impact its value and stability.

In conclusion, investing in the digital yuan is an exciting opportunity, but it is important to consider the risks involved. As with any investment, it is important to do your own research and assess whether the digital yuan is right for you. With the backing of the Chinese government, the potential for widespread adoption, and increased efficiency and accessibility, the digital yuan is definitely worth keeping an eye on.

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Bajaj Finance Share Price Analysis

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Bajaj Finance Share Price Analysis

Bajaj Finance Limited is one of the leading non-banking financial companies (NBFCs) in India, providing a range of financial products and services such as personal loans, home loans, two-wheeler loans, and more. The company’s share price has been a subject of interest for many investors, both in the domestic and international markets.

In recent years, Bajaj Finance has seen a consistent rise in its stock price, making it one of the top performers in the Indian stock market. As of 7th February 2023, the Bajaj Finance share price stands at Rs. 11,000, up from Rs. 7,000 in January 2021. This growth can be attributed to the company’s strong financial performance, increasing demand for its products, and a positive outlook for the Indian economy.

One of the key factors contributing to the rise in Bajaj Finance’s share price is its impressive financial performance. The company has consistently posted strong earnings and revenue growth over the years, reflecting its ability to attract and retain customers. In the quarter ended December 2022, Bajaj Finance reported a net profit of Rs. 2,252 crore, up by 33% compared to the same period the previous year.

Another factor contributing to the rise in Bajaj Finance’s share price is the increasing demand for its products and services. With a growing middle-class population and increasing disposable income, more and more people are seeking access to financial services, including loans and insurance.

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TD Auto Finance: An Overview

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TD Auto Finance: An Overview

TD Auto Finance is a subsidiary of TD Bank, one of the largest banks in North America. It provides auto financing services to individuals and dealerships across the United States. TD Auto Finance offers a range of financing options for new and used vehicles, including retail installment sales contracts, lease agreements, and commercial loans.

Retail Installment Sales Contracts TD Auto Finance offers retail installment sales contracts for the purchase of new or used vehicles. This financing option allows individuals to make monthly payments over a set period of time to pay off the total cost of the vehicle. Retail installment sales contracts are flexible and can be customized to fit the individual’s budget and needs.

Lease Agreements TD Auto Finance also provides lease agreements for individuals who prefer to lease a vehicle rather than purchase one. A lease agreement typically requires a smaller down payment and lower monthly payments than a retail installment sales contract. At the end of the lease, the individual has the option to purchase the vehicle or return it to TD Auto Finance.

Commercial Loans TD Auto Finance offers commercial loans for businesses in the auto industry, such as dealerships and repair shops. These loans can be used for a variety of purposes, including the purchase of inventory, equipment, and real estate. Commercial loans from TD Auto Finance are tailored to meet the unique needs of each business, and flexible repayment terms are available.

Benefits of TD Auto Finance TD Auto Finance offers a number of benefits to individuals and businesses in the auto industry. These benefits include competitive interest rates, flexible repayment terms, and a wide range of financing options to fit the needs of

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