1. Available entities are:

• An “S” Corporation
• A Limited Liability Company
• A General Partnership
• A Limited Partnership
• A Limited Liability Partnership
• A Sole Proprietorship

2. Why is the choice of business entity used important?

• How assets and dividends of the entity may be allocated among the owners.
• How the entity may be managed.
• The tax treatment of contributions of property to the entity.
  

3. What is double taxation?

A corporate tax is imposed on earnings, and earnings distributed as dividends are taxed a second time.  A corporation does not receive a deduction for dividends.

 4. What is an “S” Corporation?

Designation as an “S” Corporation is solely a tax distinction.  IRC Section 1361 defines an “S” Corporation as a “C” Corporation for which an election as a “small business corporation” under Section 1362(a) is in effect for a taxable year.  The “S” Corporation rules offer an alternative system of taxation to a business owner, whereby the shareholders (rather than the corporation) are subject to income taxation.

 5. What restrictions apply to “S” Corporations?

Under Section 1361(b), certain restrictions are placed on a “small business corporation”.  These include the following:

• The number of shareholders is limited to 100.
• An “S” Corporation must be owned by individuals who are not non-resident aliens, except that an estate and certain type of trusts may own stock.
• An “S” corporation must be a domestic corporation.
• An “S” corporation may have only one class of stock.
   

6. What is the “S” Corporation’s One Class of Stock Requirement?

A “C” Corporation may have both common and preferred stock issued to its shareholders.  Preferred stock shareholders have superior rights to that of common stock shareholders for the payment of dividends by the corporation, or a higher priority as to the receipt of liquidation proceeds in the event of the corporation’s dissolution.  Differences in voting rights may also exist between classes of common and preferred stock.  By contrast, an “S” corporation may only have one class of stock, although differences in voting rights may exist so that shares of “S” corporation stock may be voting or non-voting.

7. What is Estate Planning?

Estate Planning concerns the development of a plan providing for the support of surviving family member’s and the orderly transfer and distribution of one’s assets at death.  It may also concern planning to assure the survival of a business, to provide for one’s church and/or favorite charities, and to minimize estate transfer taxes.

As indicated above, estate-freezing and other tax planning, to minimize estate taxes and maximize the transferred estate passing to intended beneficiaries, may be considered.  Alternatively, non-tax reasons for estate planning include estate creation, income replacement, and the orderly transfer of property from one generation to the next.  Estate panning may also concern the planning for accumulation and distribution of an estate during lifetime, as well as at death. 

Learn More About The Author
Thomas D. Glascock, Esq., Attorney
Forchelli, Curto, Crowe, Deegan, Schwartz, Mineo & Cohn, LLP.