S corporations are a separate category because of the peculiarities of taxation and distribution of profits. Their feature is a one-time payment of taxes due to the transfer of income, losses, loans, and deductions to shareholders. This strategy is advantageous for large companies because of the possibility of transferring ownership and continuing the business. The analysis of the trade structure allows highlighting the requirements for companies, the benefits of structuring, profit distribution, and ethical and legal issues.
The requirements for creating a S corporation consist of several points that must be strictly followed. The first is the location; the business must be established in the United States. The second is the limitation of the joint-stock community since it can only consist of resident individuals, certain trusts, and property. The number of shareholders can be no more than one hundred and stock type no more than one. The advantages are trust among customers, suppliers, and shareholders and avoidance of double taxation. Establishing a S corporation has several requirements and benefits that work best in larger organizations.
Corporate income is taxed following the special reduced tax regime. This type amortizes organizational costs and recognizes profits when distributed to shareholders (Raabe et al., 2021). Additionally, there are various items of income tax that must be paid using the appropriate forms. For example, income tax is paid on Form 1120S and calculated tax on Form 1120-W (S Corporations, 2021). The payment of taxes on income is distributed between the enterprise and shareholders.
Corporate officials are paid in the form of wages since they provide services to the enterprise. It applies to all permanent employees, including those who are shareholders. Companies can legally pay dividends in place of social security tax due to special rules. About 60% of the profits go to distribution within the company; hence the dividend strategy is beneficial. From an ethical point of view, this may seem like tax evasion, but the law allows this behavior.
S corporations have many advantages that enable them to develop effectively. The main one is simplified, and reduced taxation since shareholders pay taxes. The forms of payment are standardized but differ for corporations and contributors. Corporate officers can be shareholders of the company and full-time employees who receive salaries. According to the S corporation experiences, this strategy of doing business is one of the leading since most large US companies use it.
References
Raabe, W. A., Young, J. C., & Nellen, A. (2021). South-Western federal taxation 2022: Corporations, partnerships, estates and trusts. Cengage Learning.
S corporations | internal revenue service. (2021). Irs.Gov.