Advantages and Disadvantages

Arizona S Corporation

Arizona S Corporation Advantages and Disadvantages

Arizona S Corporation Advantages and Disadvantages - S Corporation Definition-A corporation with 75 or fewer shareholders,that has elected and qualified for a special tax status with the Internal Revenue Service (IRS).

The main advantage associated with the S Corporation is that the income passes through to the shareholders, therefore avoiding a perceived double taxation of a C-Corporation.

Should I form a Arizona S Corporation?

The S Corporation:

An "S Corporation" is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (enacted in 1958 and periodically amended) and receives IRS approval of its request for Subchapter S status. As a legal entity (an artificial person), the S Corporation is separate and distinct from the corporation's owners (the stockholders).

Advantages and Disadvantages: Arizona S Corporation

Advantages of the S Corporation:

  • The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.

  • Fractional ownership shares are easily accommodated in the initial offering of stock.

  • The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.

  • The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.

  • With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.

  • To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.

  • The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.

  • Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.

  • Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.

Disadvantages of the S Corporation:

  • Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.

  • Conflicts or disagreements among the stockholders may immobilize decision making.

  • Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.

  • Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.

  • Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.

  • Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.

  • If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.

Arizona’s 2012 Business Tax Climate Ranks 27th

Arizona ranks 27th in the Tax Foundation's State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Tax Freedom Day Arrives on April 2 in Arizona

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2011, Arizona taxpayers work until April 2 (ranked 39th nationally) to pay their total tax bill, 10 days earlier than national Tax Freedom Day (April 12).

Arizona's State and Local Tax Burden Below National Average

Arizona's 2009 state and local tax burden of 8.7% of income is below the national average of 9.8%. Arizona's tax burden has decreased overall from 10.3% (18th nationally) in 1977 to 8.7% (38th nationally) in 2009. Arizona taxpayers pay $3,140 per capita in state and local taxes.

Arizona's Individual Income Tax System

Arizona's personal income tax system consists of five brackets and a top rate of 4.54% kicking in at an income level of $150,000. That top rate ranks 39th highest among states levying an individual income tax. In 2008, Arizona's state-level individual income tax collections were $530 per person, which ranked 39th highest nationally.

Arizona's Corporate Income Tax System

Arizona's corporate tax structure consists of a flat rate of 6.968% on all corporate income. That rate ranks 26th highest among states levying corporate income taxes. In 2008 state-level corporate tax collections (excluding local taxes) were $122 per capita, which ranked 33rd highest nationally.

Arizona Sales and Excise Taxes

Arizona levies a 5.6% general sales or use tax on consumers, which is slightly below the national median of 5.85%. 2007 combined state and local general and selective sales tax collections were $1,800 per person, which ranked 7th highest nationally. Arizona's gasoline tax stands at 19.0 cents per gallon (ranked 41rst highest nationally), while its cigarette tax stands at $2.00 per pack of twenty (10th highest nationally). The sales tax was adopted in 1933, the gasoline tax in 1921 and the cigarette tax in 1935.50-state table of sales, cigarette, gas, beer, wine, and spirits tax rates.50-State Table of State and Local General and Selective Sales Tax Collections Per Capita

Arizona Property Taxes Comparatively Modest

Arizona is one of the 37 states that collect property taxes at both the state and local levels. As in most states, local governments collect far more. Arizona's localities collected $846.45 per capita in property taxes in fiscal year 2006, the latest year for which the Census Bureau has published state-by-state data. At the state level, Arizona collected $65.27 per capita during FY 2006, making its combined state/local property tax collections $911.73 per capita, ranked 35th nationally.

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