Atlanta Taxation & Financial Services Inc

When setting up a business, one of the most important decisions you’ll have to make is to decide which form of business entity is appropriate for your business.  There are pros and cons to any forms of business entity, but it’s important to fully understand the tax benefits, drawbacks and risks associated with each form in order to make an intelligent decision.

An S Corporation is actually a corporation organized under applicable state laws.  However, from a federal standpoint, an S corporation is not subject to tax.  Instead, all income, losses, deductions, and credits are passed through to its shareholders.  For this reason, an S corporation is referred to as a pass-through entity.  The income is taxed only once at the shareholder level, and the S Corp itself is not taxed.  It is this very distinction that separate a C Corp from an S corp , thus avoiding double taxation.

Keep in mind however that thoughthe S corporation may not be responsible for tax, when a C Corp converts to an S Corp or an S Corp acquires assets from a C Corp in a tax-free transaction, it may be subject to a corporate-level “built-in gains” tax in addition to the tax imposed on its shareholders.  The application of the built-in tax gains may add some complexity and is only mentioned as one of the many considerations undertaken by a corporation making an election under these circumstances.  Millions of corporations have found S corporation to be beneficial for both federal and state income tax purposes.

For more information, please contact a tax advisor at info@atlantataxation.com or (678) 795-0600.