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Understanding subchapter S corporations

On Behalf of | Apr 9, 2017 | Business Formation & Planning

Evaluating the different types of business operating models may most commonly be something Florida entreprenuers do when initially establishing a busines. However, this can also be done once a business is up and running as it is possible to make a change in what operating structure a business utilizes in some cases. One example is if a standard C corporation wishes to migrate to a subchapter S corporation.

Entrepreneur explains that this election is posible within two-and-a-half months into the beginning of a fiscal year and requires a unanimous shareholder vote approving the switch. For many companies, a common and major factor impacting the choice to operate as an S corporation versus a C corporation is taxation.

In an S corporation, there are no corporate income taxes assessed. Instead the full tax liability is borne by the shareholders. The Internal Revenue Service notes that this is often referred to as a pass-through model because the profits and losses of the business are passed through to the shareholders. It is on each shareholder’s individual tax return that income or losses are reported. Only shareholders pay income taxes, not S corporations.

Clearly the ability to reduce a company’s tax burden is a big benefit but there are also some restrictions associated with S corporations. For one, companies must operate domestically only. They are also capped to a certain number of shareholders. The shareholders can only be some trusts, estates, approved tax-exempt charities and individuals. Some S corporations are allowed to use a cash accounting versus an accrual accounting method as well.