- Pass-through Income Tax for Corporations
- Savings on Self-Employment Tax for both LLCs and Corporations
Is an S-Corp Election a Good Fit for My Company?
S-Corp’s are restricted both in who can own stock and in how profits can be distributed.
- Ownership Restrictions
- There must be 100 or fewer shareholders;
- The shareholders must be residents of the United States; and
- Shareholders cannot be other LLCs or corporations.
- Restrictions on Distribution of Profits
Al, Ben, and Charlie form ABC, Inc. as an S-Corporation. Al invests $10,000, while Ben and Charlie each invest $5,000. Al would have 50% ownership in the corporation with Ben and Charlie each having 25% ownership in the corporation. When profits are distributed, Al would receive half of all profits distributed, while Ben and Charlie would each receive a quarter of the profits.
In the case of an LLC that is not taxed as an S-Corp, the wishes of the owners, not the stock-ratio-system, determine how corporate profits are distributed. For example:
Al, Ben, and Charlie form ABC, LLC. Even if Al invests $10,000, while Ben and Charlie each invest $5,000 (as in the previous example), Al, Ben and Charlie could decide to distribute corporate profits according to each shareholder’s ownership percentage. Since ABC, LLC is an LLC and not an S-Corp, Al, Ben, and Charlie would be restricted to the stock-ratio distribution.
Please feel free to call or e-mail me with any questions, or to schedule a free consultation:
Kevin O'Flaherty | (630)324-6666 | firstname.lastname@example.org