But before you start poking around the FAQ (a great place to dig deeper into subject matter), let me give you some background information on Subchapter S corporations.I make this point again and again at this website, but as you begin your research let me clear up a point of confusion: An S corporation is not really a corporation.
On the other hand, individual shareholders often prefer that the distribution be treated as a redemption, for three reasons: A distribution qualifies as a stock redemption only if it significantly reduces the interest of the shareholder in the corporation.The Internal Revenue Code uses four tests to make this distinction: To prevent gamesmanship among related parties, Congress has added another layer of rules that must be analyzed to determine if a distribution is a redemption.If you know you're ready to set up an S corporation, you can click on your state name in that list that runs along the left edge of the window.That'll take you to a page that describes the steps for setting up an S corporation in your state and provides an inexpensive downloadable kit you can purchase if you think you need help. Don't rush into the S corporation decision just yet.But all along, these entities were really just small corporations that used a set of tax accounting rules found in a subchapter of tax law. When state legislatures started allowing people to form new-and-improved business entities like limited liability companies, the IRS decided to allow these entities to also use the same "Subchapter S" accounting rules if they wanted.
Note: The Wyoming legislature was the first to create the laws that allowed for a limited liability company, and did so in 1977.The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property (capital gain). Important Note: If a shareholder assumes a liability or takes property subject to a liability, the amount of the distribution is reduced by the amount of the liability. Special rules also apply at the corporate level. Special rules apply to distributions to a shareholder in exchange for the shareholder’s stock (redemptions).Tweet This website grew out of a graduate tax class I taught at Golden Gate University's tax program several years ago.The site provides you with all sorts of background on S corporations, including do-it-yourself downloadable kits.Over the next two decades, roughly, every other state as well as the District of Columbia followed suit.