Washington S Corporation
Advantages and Disadvantages

Washington S Corporation and Asset Protection

Washington S Corporation

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 Washington 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).

Washington S Corporation:
Advantages and Disadvantages

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.

Washington's 2012 Business Tax Climate Ranks 7th

Washington ranks 7th in the Tax 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 16 in Washington

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, Washington taxpayers work until April 16 to pay their total tax bill, ranking it 5th highest in the nation. This is 4 days after national Tax Freedom Day (April 12).

Washington's State and Local Tax Burden Below National Average

Washington's state and local tax burden is currently estimated at 9.3% of income (29th nationally), below the national average of 9.8%. Compared to the 1977 data, Washington had a tax burden of 9.6% (31st nationally), decreasing 0.3% overall. Currently Washington taxpayers pay $4,408 per capita in state and local taxes.

Washington Levies No Individual Income Taxes Washington levies no state personal income taxes, joining Alaska, Florida, Nevada, South Dakota, Texas and Wyoming as the only other states not to do so.

Levies Nation's Oldest Gross Receipts TaxWashington's corporate tax structure contains no corporate income tax. Nevada, Texas and Wyoming are the only other states that do not levy corporate income taxes. However, Washington levies the nation's oldest gross receipts tax, the Business and Occupations (B&O) Tax, first instituted in 1933. Washington, Texas, Ohio, Michigan and Delaware are the only states to levy economy-wide gross receipts taxes.

Washington Sales and Excise Taxes

Washington levies a 6.5% general sales or use tax on consumers, above the national median of 5.85%. In 2007 combined state and local general and selective sales tax collections were $2,661 per person, which ranks 2nd highest in the nation. Washington's gasoline tax stands at 37.5 cents per gallon, which ranks 3rd highest nationally. Washington's cigarette tax stands at $2.025 per pack of twenty and ranks 9th highest nationally. The sales tax was adopted in 1933, the gasoline tax in 1921 and the cigarette tax in 1935.

Washington Property Taxes

Washington is one of the 37 states that collect property taxes at both the state and local levels. As in most states, local governments collect the majority of property taxes. Washington's localities collected $835.25 per capita in property taxes in fiscal year 2006, which is the latest year the Census Bureau published state-by-state property tax collections. At the state level, Washington collects more property taxes than most states do. In FY 2006, Washington collected $257.73 per capita, bringing its combined state/local property taxes to $1,092.98 per capita, which ranks 25th highest nationally.

Federal Tax Burdens and Expenditures: Washington is a Donor State

Washington taxpayers receive less federal funding per dollar of federal taxes paid than the average state. Per dollar of Federal tax collected in 2005, Washington citizens received approximately $0.88 in the way of federal spending. This ranks the state 38th highest nationally and represents a decline from 1995, when Washington received $0.97 per dollar of taxes in federal spending (ranked 31st nationally).

Reference - Tax Foundation

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