Form with which a corporation may resolve to alter its corporate status top that of a subchapter (S) corporation.
S Corporation With Passive Income In Cook
State:
Multi-State
County:
Cook
Control #:
US-0046-CR
Format:
Word;
Rich Text
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FAQ
Because of the one-class-of-stock restriction, an S corporation cannot allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike partnerships or LLCs taxed as partnerships where the allocation can be set in the partnership agreement or operating agreement.
A prominent downside of the corporate structure is the phenomenon known as double taxation. This occurs because the corporation itself is considered a separate legal entity by tax authorities. As a result, when the corporation earns profit, it is taxed at the corporate tax rate.
Step 2: Weigh the pros and cons Advantages: Enhanced credibility, access to capital, limited liability, and the ability to attract investors and top talent. Disadvantages: Higher setup and maintenance costs, double taxation, extensive record-keeping and reporting requirements, and reduced privacy.
To qualify as a passive entity, the entity must be a partnership or trust, other than a business trust, for the entire accounting period on which the tax is based. The entity may not qualify as passive for the accounting period during which the conversion occurs even if it meets the 90 percent income test.
Passive income consists of amounts derived from royalties, rents, dividends, interest and annuities. Although conventional rental income is passive in nature, rents derived from an activity where the S corporation/lessor renders significant services or incurs substantial costs will not be treated as passive income.
One major advantage of an S corporation is that it provides owners limited liability protection, regardless of its tax status. Limited liability protection means that the owners' personal assets are shielded from the claims of business creditors—whether the claims arise from contracts or litigation.
As such, there are millions of S corporations in the United States, with some examples being retail stores, banks, car dealerships, and movie theaters.
Limited liability of stockholders, government regulations, and additional taxes are the major disadvantages of a corporation.
Because of the one-class-of-stock restriction, an S corporation cannot allocate losses or income to specific shareholders. Allocation of income and loss is governed by stock ownership, unlike partnerships or LLCs taxed as partnerships where the allocation can be set in the partnership agreement or operating agreement.