Summary Of Corporate Forms A summary of the tax characteristics of different corporate forms.

Domestic International Sales Corporation The DISC was used in conjunction with Foreign Sales Corporations, but has been reborn following 2003 legislation.

Limited Partnership Limited Partnerships are often used for investment-holding purposes, and have 'pass-through' status for domestic partners.

"S" Corporation

“S” Corporations (which are not available to non-residents) are very popular for small businesses in the US. An S corporation is a regular corporation (normally taxable under subchapter C of the Internal Revenue Code, and thus referred to as a C corporation), or a limited liability company which has elected to be taxed like a corporation, which files form 2553 with the Internal Revenue Service. The result is that the corporation's net income (after business expenses and other permissible deductions) is required to be included in the individual returns of the stockholders of the corporation, in the same percentages as their percentages of ownership of the corporation.

The imposition of a maximum corporate tax bracket in 1988 that was higher than the maximum individual tax bracket made S corporation status very attractive.

A corporation must meet the following qualifications to be eligible for an S election:

• It must not have more than 35 shareholders;
• All shareholders must be either individuals, estates or certain types of trusts; a corporation or partnership may not be a shareholder;
• Nonresident aliens may not be shareholders;
• The corporation may have only one class of stock;
• The corporation must be a domestic corporation.

A shareholder's share of net operating loss of an S corporation is limited to the sum of the shareholder's adjusted basis in the stock of the corporation plus his adjusted basis in any debt the corporation may owe him. Disallowed losses and deductions may be carried forward to sebsequent years.

Distributions by an S corporation are treated as a tax-free return of capital to the shareholder, provided the corporation has no accumulated earnings and profits, to the extent of the shareholder's basis in his stock. Such distributions are treated as taxable gain to the extent of the shareholder's basis in his stock. Such distributions are treated as taxable gain to the extent they exceed the shareholder's basis in his stock.

One disadvantage of an S corporation election is that employee status is denied to those shareholders with stock ownership exceeding 2 percent. As a consequence, an S corporation cannot deduct the cost of fringe benefits provided at the corporation's expense (for example, accident and health insurance) for the benefit of these shareholder-employees. Thus, an S corporation cannot provide many fringe benefits on a tax-free basis.

In July, 2005, Internal Revenue Service officials announced that the agency was to launch a comprehensive study of tax reporting compliance amongst America's rising number of S corporations, a form of corporate entity that had grown enormously in popularity over the last twenty years.

According to the IRS, the study would examine 5,000 randomly selected S corporation returns from tax years 2003 and 2004.

Since the mid-1980s, the number of S corporations had risen rapidly, growing from 724,749 in 1985 to 3,154,377 in 2002. Among S corporations with more than $10 million in assets, the growth rate has been even faster. From 1985 to 2002, the number of these larger S corporations grew more than ten-fold, from 2,305 to 26,096.

“The use of S corporations has exploded,” observed IRS Commissioner at the time, Mark W. Everson. “The IRS needs a better understanding of what this means for tax compliance. This research is critical for achieving our strategic goal of ensuring that corporations and high-income individuals are paying their fair share," Everson added.

S corporations are now the most common corporate entity. In 2009, the IRS reported that the number of S corporations increased 5.1 percent to 3.9 million for tax year 2006, so that S corporations represent nearly two-thirds of all U.S. corporations. The number of shareholders in S corporations also increased 5.1 percent to 6.7 million. Total net income (less deficit) increased 7.0 percent to $386.2 billion.

Summary Of Corporate Forms A summary of the tax characteristics of different corporate forms.

Domestic International Sales Corporation The DISC was used in conjunction with Foreign Sales Corporations, but has been reborn following 2003 legislation.

Limited Partnership Limited Partnerships are often used for investment-holding purposes, and have 'pass-through' status for domestic partners.