|
One of the disadvantages of the corporate form is that
you are subject to double taxation. The corporation
is considered a separate entity from its stockholders
and is taxed on its profits. When these profits are
distributed to the shareholders as dividends, they are
taxed again (on the personal level.)
You can avoid this double taxation by forming an LLC
(and electing to be treated as a partnership on the
Application for Employer Identification Number) or by
electing to have your corporation treated as an S Corporation
(by filing Form 2553 within 75 days of first forming
the business or first transacting business.)
S Corporations and LLCs are taxed as if they were partnerships
- no tax is due on the entity level. Each partnership
engaged in a trade or business must file a return on
Form 1065 showing its income, deductions, and other
required information. The return shows the names and
addresses of each partner and each partner's distributive
share of taxable income and deductions. This is an information
return and must be signed by a general partner. If an
LLC is treated as a partnership, it must file Form 1065
and one of its members must sign the return. The partnership
does not pay any tax on its income but "passes
through" its profits or losses to its partners.
Partners must include partnership items such as their
distributive share of income and deductions on their
personal tax returns.
NOTE: In addition to the filing of a Form on the Federal
level, some states, notably New York, may require that
you file a state form to effect the election as well.
Please check with your state tax authorities.
|
