What is an S Corporation and what are its tax advantages?
An S Corporation is a unique type of business entity in Washington state. It is a type of corporation that allows the owners to be taxed as pass-through entities, similar to a sole proprietorship or partnership. The income and losses are “passed through” to the owners to report on their individual tax returns. This provides an advantage over other corporations because it “averts the double taxation of corporate profits.” An S Corporation is formed under the laws of Washington state, much like other corporations. It must file articles of incorporation with the Washington Secretary of State and then register with the IRS. The owners must then file an election for the S Corporation status with the IRS. When an S Corporation is formed, the owners must divide the business into two parts: the owners, called shareholders, and the company, called the corporation. The shareholders own the company, and the corporation is responsible for all of the business’s operations. The primary benefit of an S Corporation is that it provides a tax advantage to the shareholders. While the corporation is required to pay taxes on all of its income, the shareholders are only taxed on the wages they receive from the corporation. The remaining income is passed through to the shareholders and taxed at the level of the individual shareholder. This helps to reduce the total amount of taxes paid on the company’s profits.
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