How To Enjoy The Tax Benefits Of An S-corporation
The S corporation is great for small businesses due to the fact that it eliminates double taxation of the standard corporation
. S corporations get some appealing tax benefits while at the same time allows business owners to avail of liability protection of a corporation. In this form of company organization, the income as well as losses are passed through to shareholders and are included on their individual tax returns, thereby causing just one level of federal tax to be paid.
The S corporation should not have more than 75 shareholders with a husband and wife shareholding couple counting as one shareholder. In addition, the following entities only can count as shareholders: individuals, estates, certain trusts, tax-exempt charitable organizations, certain partnerships and finally, other S corporations, though only when the S corporation is the sole shareholder.
There are certain contents that are common to the S corporation shareholder's agreement and they include an explanatory statement, consent to S election, restriction on sale of common stock, restrictive legend, request to transfer, transfer by reason of death, transfer in violation of agreement, stock issued or transferred in the future, revocation of election, termination, miscellaneous, and signatures of shareholders as well as witnesses.
The explanatory statement will set out the intention of the company to be taxed as an S corporation and towards this end, each shareholder agrees to the election by the Company of this tax status and that each shareholder undertakes not to act in a manner that is prejudicial to the organizational status of the company. Furthermore, each shareholder agrees not sell or assign, encumber, pledge, hypothecate, donate or otherwise transfer all or part of the shares of common stock except pursuant to the terms of the agreement.
Every stock certificate of the company that represents shares of common stock shall bear a conspicuous restrictive legend and pertains to shares owned of record or beneficially by each shareholder. Transfer of shares shall be permissible after the shareholder gives notice to the company of a certain time period, and once the company consents to such transfer, the shareholder will be allowed to transfer shares according to the terms of his or her notice to the company.
In case of death of a shareholder, the company shall not make any unreasonable objections nor will it withhold consent to any transfer as a consequence of death of the shareholder. In the event that the shareholder tries to transfer his or her shares in violation of the terms and conditions of the S corporation shareholder's agreement, such transfer will be held void and the transferee or beneficiary shall not be the record or beneficial owner of such shares.
There shall also be specified in the S corporation shareholder's agreement the terms and conditions regarding stock issued or transferred in future. As regards the revocation of the election, the agreement shall lay down that the company will try to reasonably project quarterly the net tax liability and lastly, the agreement shall specify terms for termination of the corporate status.
The S corporation shareholder's agreement forms are readily available in the market and finding one should not pose any problem as there are many vendors who specialize in such documents and for a few dollars one may obtain completely researched and well formed shareholder's agreement forms. There is no need for researching and creating one from scratch as buying these documents provides an avenue for obtaining comprehensively created solutions that have had experts draft them and they are suited for all manner of use. Spending a few dollars, one could reap great benefits as there is plenty to be saved in terms of time, money and cost as well as being tailored to suit individual requirements.
by: Wade Anderson
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