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Choosing a Hispanic Business Entity

24 Jul, 2012

S Corporations

Like most CPAs, I like S corporations. The S corporation has been around a long time and has been tested by the IRS and the courts. The Hispanic business owner pays payroll taxes on his or her wages, but company profits are not subject to a self-employment tax. An S corporation has limited liability. If someone sues your business, they sue your business, not you personally. Hispanic business owners with this type of entity should keep their personal and business records separate, or they could lose tax advantages and liability protection.

IRS Defines an S Corporation:
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 flow-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 responsible for tax on certain built-in gains and passive income.

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
    • including individuals, certain trust, and
    • estates and may not include partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have one class of stock
  • Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.

For more on S Corporations http://www.irs.gov/businesses/small/article/0,,id=98263,00.html

C Corporations

I also like C corporations as they enable you to deduct more “ordinary and necessary” business expenses. “Ordinary and necessary” is IRS parlance for legitimate, deductible business expenses. In a C corporation, business owners can maximize their deductions for themselves as employee benefits. As with an S corporation, there is no self-employment tax and C corporations offer limited liability. Beware, though: A C corporation could be labeled a “personal holding company,” which carries a flat 35 percent tax rate on company profits. Double ouch!

IRS Defines a C Corporation:
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Read more on C Corporations http://www.irs.gov/businesses/small/article/0,,id=98240,00.html

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About the author

Armando G. Roman
Armando G. Roman

Armando G. Roman CPA/PFS MBA contributes a regular column to LatinBusinessToday.com on financial and tax issues of importance to small and medium business owners. He has more than 25 years of experience counseling clients. He also has been a columnist for La Opinion, the nation’s largest Spanish-language daily newspaper. He is chairman of the board of directors of the Arizona Society of Certified Public Accountants, chairman of the Audit Committee of Maricopa Integrated Health Systems, and a board director of the Arizona Hispanic Chamber of Commerce. Contribution: articles, blogs.

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