S-Corporation / Pass-Through Taxation

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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.