S Corporations Income is only taxed once – to shareholders  No corporate income tax  Doesn’t matter if income is distributed Requirements  < 100 shareholders Traditional family considered one shareholder  Shareholders must be individuals, estates, grantor trust  One class of stock  All shareholders must consent to election

S corporations  Losses limited to basis  Basis: cash invested  Basis increased by income, loans to S corp  Basis reduced by losses  Losses limited by basis carried over until basis is created

C corporations  Corporate income tax rates 34 – 35%, generally, on income above $75,000  More than all but the top individual rates for MFJ with taxable income above $350,000  Dividends paid: not deductible Currently taxed at capital gains rates to recipients  Most taxpayers: 15%  Dividends received: Own < 20% company: 70% not taxed Own > 80%: not taxable

C corporations  Capital gains: taxed as ordinary income  Capital losses: can only offset capital gains Excess carried back three years; forward five years

C corporations  AMT Pay AMT if more than tax computed using tax rates  Large income, no income tax, makes Congress sad Taxable income calculated differently for AMT purposes  AMTI ACE adjustment: Book Income vs. Taxable Income

C Corporations  Losses Carried back 2 years, forward 20 years  Accumulated Earnings Don’t want corporations to not pay dividends What are the plans for the funds?  Excessive compensation To avoid dividends?

LLCs  Limited liability: like a corporation  But no corporate income tax Income taxed to owners like a partnership  Rules vary by state Some states require multiple owners Corporations, partnerships can be owners (unlike S corp)  LLPs Similar to LLCs but only professionals can own (doctors, attorneys, etc.)

LLCs  Can choose to be taxed as either a partnership or C corporation  Can change: Within 75 days on start of year of desired change Can’t change again for five years  But can change within first five years of entity