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Choice of Business Form: The S Corporation

When starting a small business, one of your most important decisions is choosing the form of entity. You have many options, such as a limited liability company (LLC), C corporation, or S corporation. A number of tax and nontax factors must be considered in order to make the best choice for your business circumstances.

An S corporation is a corporation under state law, created by filing articles of incorporation. Following incorporation an election is made with the IRS that converts a C corporation into an S corporation. This election affects the taxation of your business in a number of ways, most significantly by providing pass-through taxation. This means that all of the income, losses and tax attributes of the business are allocated to the shareholders who report on their individual returns. The corporation itself does not pay any tax on current income.

For some businesses, having “pass-through” tax treatment is the most important consideration. Others want to be able to realize tax savings by structuring compensation plans to allow for salary and dividends. For still others, a more closely held ownership structure is desired. The S corporation form can help meet all these objectives.

But, an S corp may not be the right option for your business.  The best chance a business owner has of making the right choice is to have a clear understanding of the business entity types being considered. This White Paper will help you develop that understanding by highlight the corporate and tax law aspects of the S corporation.

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