S Corporations Can Benefit Many Closely-Held Hospitality Firms

In his discussion S Corporations Can Benefit Many Closely-Held Hospitality Firms by John M. Tarras, Assistant Professor, School of Hotel, Restaurant & Institutional Management at Michigan State University, Assistant Professor Tarras initially offers: “Organization as an S corporation has many advantages for hospitality firms since passage of the Tax Reform Act of 1986. The author discusses those advantages and lists the disadvantages as well.” In the opening paragraphs Tarras alludes to the relationship between hospitality firms, S corporations, and the Tax Reform Act of 1986, and then defines what an S corporation is. “An S corporation is a form of business entity that combines many of the tax advantages of partnerships with the legal attributes of a corporation, including limited liability for its shareholders. Its name is obtained from a subchapter of the Internal Revenue Code. Except for tax purposes, the S corporation is treated in the same manner as any regular corporation. Like a partnership, income and losses for an S corporation are generally passed through directly to shareholders for inclusion on their individual returns. An S corporation thus avoids the double tax problem facing regular corporations.” There are certain criteria to be met and caveats to be avoided in qualifying for S corporation status. Tarras lists and cites these for you. “Due to the complicated nature of S corporations, the election may be inadvertently terminated if the eligibility requirements are violated,” Tarras expands and cites. As the article suggests at the outset, there are advantages and disadvantages to S corporation status; the author outlines some examples for you. “Traditionally, the S corporation has been used by hospitality firms wishing to avoid the "double tax" problem of a regular corporation,” Tarras informs you. “Regular corporations are taxed once at the corporate level, and again at the shareholder level when income is distributed to shareholders in the form of dividends.” Tarras advises you as to why an S corporation is an advantage in this situation. “Since the S corporation generally is not subject to any corporate taxes, it generally makes no difference whether distributions to shareholders of S corporations are characterized as compensation or dividends,” thus the double tax is avoided. This is just one such positive illustration. Assistant Professor Tarras wants you to know: “Perhaps the most important reason to consider the S corporation has to do with the downward revision of tax rates for both individuals and corporations.” He highlights a case study for you. Some of the disadvantages of S corporation affiliation are the caveats alluded to earlier. They include, “the limitation of an S corporation of 35 shareholders,” Tarras cites. “Also, there are limits as to who may own stock in an S corporation.” These are but two of the limitations of an S corporation. Tarras closes with a further glimpse of the down-sides of an S corporation. This article is available in Hospitality Review: http://digitalcommons.fiu.edu/hospitalityreview/vol6/iss1/6 S Corporations Can Benefit Many Closely-Held Hospitality Firms by John M. Tarras Assistant Professor School of Hotel, Restaurant & Institutional Management Michigan State University Organization as an S corporation has many advantages for hospitality firms since passage of the Tax Reform Act of 1986. The authordiscusses those advantages and lists the disadvantages as well. The Tax Reform Act of 1986 (TRA)' has had a tremendous impact upon the hospitality industry. The massive changes in TRA will affect the manner in which individuals and corporations will be taxed in the future. Because of these changes, many closely held hospitality firms which are incorporated should seriously consider organizing as S corporations. An S corporation is a form of business entity that combines many of the tax advantages of partnerships with the legal attributes of a corporation, including limited liability for its shareholders. Its name is obtained from a subchapter of the Internal Revenue Code.2 Except for tax purposes, the S corporation is treated in the same manner as any regular corporation. Like a partnership, income and losses for an S corporation are generally passed through directly to shareholders for inclusion on their individual returns. An S corporation thus avoids the double tax pro blem facing regular corporation^.^ In order to qualify as an S corporation, a business has to meet the following criteria: The corporation may not have more than 35 shareholders. (A married couple filing a joint return is counted as one shareholder.4) All shareholders must be U.S. citizens or residents, and they must be natural persons, estates, or certain types of t r ~ s t s . ~ The corporation may have only one class of stock outstanding. (However, different votingrights are permitted for different shares of stock.6) The corporation may not own 80 percent or more of the stock of any other corporation.7 If a hospitality firm can meet the above requirements, then the S election can made by filing Form 2553 with the IRS.8 All shareholders of the corporation must sign the election form to make the election FIU Hospitality Review, Volume 6, Number 1, 1988 Copyright: