In a high percentage of cases the Subchapter S corporation and the LLC is used in entrepreneurial business formation often for the reason of liability protection.
The Subchapter S corporation and LLC by IRS code is supposed to be a pure flow through of profits and not taxed like a C corporation, which is taxed at the corporate level and then a dividend tax if dividends are made.
Court of Federal Claims that had ruled disbursements to the shareholders of a Subchapter S Corporation for the payment of state income taxes to be allowable costs.
A Subchapter S Corporation is a closely held entity (no more than 100 shareholders) that makes a tax election so as to avoid double taxation, once at the corporate level and once at the shareholder level.
By contrast, LLC owners and Subchapter S corporations
avoid this double taxation on a sale of assets because the business's tax liabilities are passed through them; the LLC or S corporation does not pay a tax on its income.
That is, the various states in which ECC does business exempt Subchapter S corporations
from state income tax.
Of course, both the Subchapter S corporation
and limited partnership variations were efforts to obtain insulation from business liabilities while mitigating the socalled double tax that results when a C corporation pays federal income taxes on its profits and the shareholders pay federal income taxes a second time when those profits are distributed to them as dividends.
2) Indeed, Bittker and Eustice acknowledge the close similarity between the current investment adjustment system and the rules for Subchapter S corporations
by stating that investment adjustment rules under the current consolidated return regulations "resemble the fluctuating basis rules for shareholders of Subchapter S corporations
who likewise increase the basis of their stock for undistributed earnings and reduce basis for losses and distributions.
Part of the problem with the Census Bureau report is its use of administrative data which includes only individual proprietorships, partnerships and Subchapter S corporations
2) Joint Committee on Taxation, Present Law and Proposals Relating To Subchapter S Corporations
and Home Office Deductions (JCS-16-95), 5/24/95, Table 3.
This is because the Census counts only individual proprietorships, partnerships and Subchapter S Corporations
, while excluding other legal forms of business organization, including Subchapter C Corporations.
If a corporation is an S corporation for its first taxable year beginning after December 31, 1996, the accumulated earnings and profits of the corporation as of the beginning of that year will be reduced by the accumulated earnings and profits (if any) accumulated in any taxable year beginning before January 1, 1983, for which the corporation was a subchapter S corporation