S-Corporations: Formation, Operation, and Termination of a Partnership

Discussion Questions
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Discussion Questions
Response to question 1
An S corporation, or S Corp, is understood as a special kind of corporation that is created through an Internal Revenue Service election. To be eligible as an S-corp, the corporation has to meet several requirements. It has to be a domestic corporation, must have at most 100 shareholders, must have only allowable shareholders, must not be an ineligible corporation, and it must have just a single class of stock (Internal Revenue Service, 2014). An S Corporation can be terminated simply by revoking the S election. A statement will be filed with the IRS Center wherein the original election of the corporation was filed. To revoke an election properly, the consent of shareholders who at that given moment of revocation own over 50% of the outstanding and issued shares is needed (Internal Revenue Service, 2014).
Pros of an S-Corp: it avoids the double taxation which happens with C-Corporations. Secondly, there is limited liability. This is because they are deemed as distinct entities and not as part of their owners for all purposes except for taxation. As such, the debts that the corporation incurs are the corporation’s responsibility, not the shareholders’. Shareholders can only be held responsible up to the amount of funds they invested in the firm. (Internal Revenue Service, 2014) Thirdly, whenever an S-Corp ends the fiscal year with losses, those losses appear on the shareholders’ individual income tax returns. Cons of an S-Corp: S-Corps cannot deduct fringe benefits offered to shareholders who are staffs as a business expenditure. Secondly, passing income of the business through shareholders could at times be disadvantageous. If the company is profitable, its shareholders must pay income tax on their share of profitability, even though that money is not given to them (Internal Revenue Service, 2014).
Response to question 2
The formation of a partnership business basically necessitates an intentional association of persons who together or jointly own the business, and have the intention of conducting the business for profit. Persons could form a partnership company through oral or written agreement. A partnership agreement usually governs how the partners relate to the partnership and to each other (Landau, 2005). During operation, every partner in the partnership owes a fiduciary duty to co-partners and to the partnership. Moreover, every partner has a right of participating equally in the partnership’s management, and a right to share the profits of the partnership. Since partnerships are seen as an association of co-owners, every partner is taxed on his/her proportional share of partnership profits. Termination of partnership occurs when one of the partners ceases to be a partner. A partnership is terminated on the sale of at least 50 percent of the interest in a partnership in a period of 1 year (Landau, 2005).
Response to question 3
In order to limit the number of owners that an S-Corp may have, family members are treated as a single shareholder. For taxable years that started after 12/31/2004, a family member can elect to have all the family members that hold indi...