S Corporations are so named as they are taxed under Subchapter S of the Internal Revenue Code.
This indicates that this type of business is not a tax paying entity but is a conduit through which gains and losses are transferred to it's shareholders.
The shareholders pay the taxes when there is a profit. The corporation is a separate entity from it's owners.
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Unlike a sole proprietorship S Corporations do business as a separate entity and can be sued. It's owners are protected from liability and it has a perpetual life. A shareholder has the ability to transfer his or her stock during his or her lifetime or at death but with certain limitations.
Categories of shareholders are limited to individuals, estates, certain trusts and some tax exempt organizations. The number of shareholders are limited to 75.
In order to get an S Corporation started Articles Of Incorporation must be filed with the Secretary Of State and in some cases with the Registrar of Deeds in the county wherein the corporation is to be domiciled. Setting up this type of corporation is much more complex than a partnership and costs are significantly more. Stockholders put up money to get it going.
This type of business can shift income to family members for tax saving purposes by making them stockholders. Appreciation of stock value can be transferred to other family members thereby saving on estate taxes.
Advantages Of S Corporations
Disadvantages Of An S Corporation
Life Insurance As It Applies To An S corporation
An S Corporation continues on after the death of a stockholder. It does not cease to exist. The corporation should have a buy-sell agreement which states that upon the death of a stockholder the corporation will buy the deceased stockholders shares from the heirs at a predetermined price. For obvious reasons the amount should be updated on a regular basis. This agreement is binding.
The S Corporation would own a life insurance policy on the lives of it's stockholders in amount of the stock owned. It is the owner, premium payer and beneficiary of the policy. Upon the death of a stockholder the proceeds of the life insurance policy is used to purchase the deceased stockholders shares from his or her heirs. The remaining stockholders own all the shares, the heirs are fairly compensated and everyone is happy.
Whole life insurance has traditionally been used to fund these buy-sell agreements but term life can be used on a temporary basis. The 20 year level term or the 30 year level term policies can be used.
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