Dear Board of Directors;

When contemplating whether to elect to become a “Subchapter S” or not, you must consider the benefits as well as the potential problems that might arise according to the Internal Revenue Code.
The Code allows certain corporations to elect not to be taxed. This is an important exception to the fundamental rule that income of a C corporation is taxed twice, first the income is taxed to the corporation when earned and then to the stockholders when paid out to them as dividends. Subchapter S, S corporation, or limited liability in corporations (among other terms), are treated as conduits for tax purposes. The tax liability is passed through to their shareholders. Although S corporations are not subject to income taxes § 6037 requires the electing corporation to file an annual information return because the corporation is still a “taxpayer” by virtue of §7701(a)(14).
Where the magnitude of the …show more content…
Thus, tax-exempt income, long-term and short-term capital gains, charitable contributions, foreign income taxes, ad other items that are combined with similar items derived from the shareholder’s personal activities, subjected to percentage or dollar limits or otherwise specially treated on individual income tax returns, must be stated separately and must be allocated pro rata to the shareholders under §1366(a). The allocation of the S corporation’s income to the shareholders must be realized by the corporation, even if the income is not distributed to the