With all the hoopla about the benefits of organizing new businesses as limited liability companies, the good news for subchapter S corporations has gone almost unnoticed.
Although most new business owners are selecting LLCs as the method to organize their companies, more than 2 million existing firms are organized as subchapter S corporations, according to returns filed with the IRS in 1995. Everybody knows LLC organization offers many small businesses advantages over filing as a C corporation. However, it is sometimes overlooked that being organized as an S corp can also help a company out come tax time. With the latest tax changes available to them, S corps really have something to crow about.
As you probably know, with subchapter S corporations, the earnings of a business "flow through" to the owners, where they are then taxed at the owner's personal tax rate. This is in contrast to a regular C corporation, where the business is taxed as an entity separate from its owners, and then again according to the owners' personal tax rates. This means C corporations are taxed twice.
With the clear tax advantages S corps offer, regular corporations may be looking to make changes. "The option to become an S corporation is valuable for a regular C corporation that wants to move its earnings over to a single-tax situation," says Sam Starr, a partner with PricewaterhouseCoopers LLP.
The new benefits for S corps came about as a result of a 1996 tax law, but most of the changes didn't become available until 1998, when the IRS issued regulations interpreting the law. Within the past year, small businesses have been able to put the changes to work, and it's proving beneficial, says Starr. The regulations allow for a wider range of people and businesses to be involved in S corporations, and the tax rules are simpler to follow.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.