Many small business owners are actively involved in the community and thus donate time and money to their favorite cause. In almost every case the owner believes the donation is a business deduction. It is NOT a business deduction for tax purposes except under the C-Corporation status; however, the business is still writing the check. Therefore the bookkeeper must still track the deduction and identify the donation properly so the gift is deductible on the owner’s personal tax return.
S-Corporation is an Internal Revenue Code classification granting special tax privileges contingent on certain compliance requirements. It is advantages for certain business scenarios, relationships or industries. The articles tagged here with S-Corporation are designed to help educate the reader and for them to act on this knowledge.
In the world of big business corporate earnings are taxed twice under the Internal Revenue Code. The first layer of taxation occurs with the traditional corporate income tax. The second tier of taxation happens when dividends are issued to shareholders. The shareholder pays an income tax at their personal rate.
When an entrepreneur starts out on his/her long journey of building a legacy with his business; he/she almost immediately focuses on the legal status of his business. Thoughts include: ‘Should I become a limited liability company or an S-Corporation?’; ‘What if I take on partners?’; ‘How do I get more capital without giving up control?’
One of the tax attributes of an S-Corporation over other forms of tax entities is the ability to reduce the overall tax obligation. Naturally the lower the overall tax requirement the more profit generated for the owner(s). The S-Corporation allows an owner to reduce their tax responsibility via the compensation package assigned to the owner.
There is multi-step process to establish a Limited Liability Company (LLC). You must first be recognized by the state of origin and then apply to the Internal Revenue Service to identify the particular tax entity arrangement. Both recognition processes have several steps involved. This article guides the entrepreneur through each of the steps to create a Limited Liability Company.
Those small businesses using partnership or S-Corporation formats issue Form K-1 to the respective owners. When income is assigned to the owner and there is no corresponding cash related to that income, then this income is referred to as ‘Phantom Income’. In effect, it is assigned income for tax purposes without the corresponding cash to pay the tax liability.
The shareholder agreement lays out the rules of the relationship between the shareholders of a company. Most often the agreement is poorly written because the legal team fails to understand the business aspect of each of the respective sections. One of these sections is referred to as the Article of Capitalization or commonly called the Capitalization Clause.
Dividends and distributions refer to the payment of cash to investors. Why are there two separate terms? Well, the term is tied back to the type of entity that makes the payment. Simply stated, regular corporations, i.e. C-Corporations as identified in the Internal Revenue Code use the term ‘Dividends’ and S-Corporations (Small Business Corporations) use the term ‘Distributions’. In addition to S-Corporations, other closely held business use the term ‘Distributions’ to identify amounts disbursed to the respective owners or beneficiaries. These forms of entities include Partnerships, Limited Liability Corporations, Trusts and Estates.
Although it appears relatively simple at first, it is slightly more involved than this and this article addresses the proper definition and context use when using these two similar terms. In addition, there are more differences between the two terms than just the source of the payment. For a full and detailed understanding of the terms, continue reading.
As a small business grows, there comes a time when the owner(s) should consider incorporating the business. A corporation is a separate entity recognized by the state of domicile for the business. It is as if a new life is created. The state acknowledges the existence of this entity and therefore grants limited legal rights similar to those rights possessed by the citizens of that state.