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discover that your company will be making more than anticipated, the business can give bonuses or move income to you before the end of its year, but after you need to pay your taxes.

S Corporations S corporations are those that are incorporated under the state laws in which they were formed. It also elects to not be taxed as a corpora- tion. Otherwise, S corporations are similar to C corporations. Share- holders continue to have a limited liability in the corporation, but can participate in the management without risking their liability. Again, many shareholders may also be employees of the firm.

Similar to general partnerships, S corporations don’t pay any taxes. However, they do compute taxes and report them to the IRS. All gains, losses, credits, and deductions are passed down to the shareholders. They are taxed even if the corporation doesn’t declare any dividends. However, if the corporation did declare and distribute dividends to its shareholders, these dividends would generally not be taxable since the shareholders are the ones who pay taxes on the cor- poration’s gains and income.

Only small business corporations may qualify to become S cor- porations, and then they are subject to certain requirements:

  • The corporation must be domestic.

  • There may be no more than 75 shareholders. (A husband and wife

count as one shareholder.)

  • The corporation may only have certain classes of eligible shareholders.

  • S corporations may only have one class of stock.

Limited Liability Corporations

An LLC may be a sole proprietorship, corporation, or partner- ship. Keep in mind, though, that a minimum of two members is required for federal tax purposes to operate an LLC as a partnership. Consequently, all tax benefits depend upon how the LLC operates.

An LLC is an entity formed under state law by filing articles of organization as an LLC. An LLC with two or more members is clas- sified as a partnership for federal income tax purposes unless it elects to be taxed as a corporation or was formed before 1997 and

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