Corporations - "S-Corp"

Another type of corporation is the S Corporation. It also files its own tax return but pays no taxes. The tax return is an informational return only. It tells the IRS and the State to whom the profits or losses are passed on to by means of a form called a K-1. The "stockholders" are the ones that pay the tax of the S Corp on their personal returns.  Persons forming an S Corp make a financial investment in the new company, called their basis.  Any losses are balanced against an individual's investment.

Most of the same rules apply to the S Corp that the C Corp has to follow including Articles of Incorporation and stock issue. One of the biggest audit issue for the IRS concerning S-Corps is Reasonable Compensation to the employee/owner Stockholders.  An owner who is also an employee must be paid a reasonable salary for the duties of the position.  The owner cannot take a small salary, thereby avoiding FICA (social security and medicare) taxes, and then take "large" distributions which are not FICA-taxed.