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S Corporations
An S Corp. is just like any other corporation formed under state law, except it has elected S status for federal income tax purposes. The S refers to the Internal Revenue Code subchapter that permits this election. As a result, the corporation is treated much like a partnership for federal income tax purposes, yet retained the limited liability features of a corporation. An owner of an S Corp. is considered self-employed and gets a K-1, just like a partner in a partnership. However, there is no personal liability for corporate obligations or for the negligence of other employees or co-owners. Because they have characteristics of both corporations and partnerships, S corps. are sometimes called hybrids.
S corp. status is available only to small business corporations with one class of stock and fewer than 100 shareholders. Only individuals, decedents, estates, and some types of trusts can be shareholders. Partnerships and other corporations cannot own stock in an S Corp.
Limited Liability Partnerships(LLP) and Limited Liability Corporations(LLC)
Owners of LLP’s, who are called partners, and owners of LLC’s, who are called members, are the equivalent of partners in a general partnership for tax purposes. Therefore, they are normally considered self-employed and they get year-end K-1 forms showing their taxable shares of LLP or LLC profits.
However, LLPs and LLCs may take advantage of the IRS’s check-the-box rule and elect to be taxes as a corporation. Worker-owners would then be treated as employees, just as with any other corporation. Regardless of an LLP)s or LLCs status for tax purposes, its partners or members have no personal liability for obligations of the LLP or LLC, or for the negligence of other partners, members, or employees.
Professional Corporations (PC)
Traditionally, professionals like doctors, lawyers, accountants, and so on were only permitted to practice as sole proprietors or as partnerships. However, federal income tax law strongly favored corporations over partnerships. As a result, professionals brought pressure on state legislators and licensing boards to allow them to incorporate. The results was the professional corporation (PC).
PC’s are in every respect true corporations under state law. An owner who works for the PC is usually classified as an employee and receives a W-2 at year-end just like employees of other corporations. PC’s can elect S corp. status in which case owners are treated as self-employed for federal tax purposes.
Only licensed members of the particular profession for which the PC was organized can be shareholders, director, and officers. Professionals who work for a PC are personally liable to their clients for poses. However, they are not personally liable for the negligence of their fellow professionals
C Corporations
Large businesses have little choice in their type of entity. To participate effectively in capital markets they must organize in corporate form. They also cannot qualify as S corps under the Internal Revenue Code because they have a broad shareholder base, and perhaps several classes of stock. C corp. shareholders may work for the corporation but they have no special shares and the hourly worker who owns 10 shares get a W-@ forms and neither is liable for corporate obligations or the negligence of fellow employees.
© 2019 Rhonda L Foster. All Rights Reserved.
