Question

Jane and Joe plan to go into business together. They plan to incorporate the business. What tax issues should they consider when deciding whether or not to elect S corporation status?

Answer 1

In an S - corporation, as they are also called pass through entities . The profits of the corporation is not charged to the taxes to be paid by the corporation rather the shareholders have to pay taxes on the amount of income allocated to them out of the total income earned by the corporation.

The income earned in the business as well as tax deductions, credit and losses are passed on to the shareholders.

So, the problem of double taxation is avoided in an S - corporation as in other from of organisation, the corporation pays taxes and also the shareholders pay taxes on the dividends paid to them.