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The choice to make an S corporation election

Tax considerations play an important part for any Texas business owner.  This sometimes is the motive for why such owners will decide to incorporate.  If a form of entity is not created tax expenses and income will generally end up on one's Schedule C form concerning their personal tax returns.  Filing a Schedule C is a common red flag for IRS agents that may result in an audit.

Formation of a corporation or other business entity allows for multiple owners of a business.  It can also provide a greater degree of protection from liability.

When setting up a corporation a decision needs to be made concerning whether to setup an S corporation or remain with a C corporation.  If an S status is not filed, the corporation will be considered a C corporation.

An S corporation cannot exceed 100 shareholders in number.  Taxes for an S corporation will be handled in a similar manner as a partnership.  In an S corporation, the taxes will be paid personally by the shareholder.  On the other hand, in a C corporation the business pays taxes upon the net income while the shareholders pay taxes upon distributions.

It's generally best to decide quickly if one wishes to create an S corporation.  As conversion from a C to an S corporation can be complicated, owners will generally wish to make such an election within 75 days after the corporation has opened for business.

As in many matters that concerning the formation of a business, consultation with an experienced commercial and business law attorney can be extremely helpful.  These attorneys can help plan how the business should be started.  They can also assist in making decisions concerning what sort of business entity should be formed.

Source: Forbes, "Key Facts About Corporations, S Elections & Buy-Sell Agreements," Robert W. Wood, March 18, 2014

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