Question

Part one of question, with the answer- leads to the real question that follows: Paul, John, George, and Ringo properly form a corporation. Paul and Ringo are very wealthy individuals who simply purchase stock. John and George also purchase stock in the corporation; in addition, they work for the business as president and vice-president. Does the corporation pay income tax? Will the four shareholders have to pay income tax? Might John and George have an additional income tax burden? Why? Answer: yes, they should pay income tax to departments without any doubt. they started a joint firm and doing business. they should pay taxes on the name of the firm (if they mentioned). the shareholders do not pay income tax individually. because they are the owners to the firm, the firm already paid taxes on its profits or business. hence if these people pay tax again, it is the second time payment of tax. so, these shareholders no need to pay income tax personally on the income of this firm. if they have any additional soruces of income, they must pay on those sources. yes, John and George must pay additional income tax because they are working as employees to the firm. the draws some salary from the firm. they must pay tax on their salaries to income tax department. hence these two people should pay tax on their income from salaries only. THIS IS THE QUESTION I NEED THE ANSWER TO: 7) The scenario is the same as in number 6 except that the corporation is formed as a subchapter S corporation. Would your answers to the questions in 6 change? Why?

Answer 1

S corporation:

In the above case, the corporations pay income taxes and the shareholders being the owners do not have to pay taxes. Whereas an S corporation is a pass through entity where the tax of the corporation is passed to its owners. The owners of the S corporation pay taxes on the dividends received from the corporation in addition to the tax that is imposed on the corporation based on their share of ownership and are reported in 1040. Hence in S corporation, there is no tax imposed on corporation and naturally the answer would change from answer to 6.