Essay, Research Paper: S Corporations And Cooperatives

The S Corporation was created in 1958. This was an initiative for investors, giving them access to the corporate form of doing business without incurring two levels of tax. The popularity, however, was not always there. As tax codes changed, so did the interest in them. The S Corporation has gained most of its popularity in 1986, when the rules for C Corporations became less attractive to shareholders. Not every business can qualify for this status, they must first meet the following requirements.

The business must first qualify as a "small business corporation"�. This can be further defined as a domestic corporation that has 75 or fewer eligible shareholders, is an eligible corporation and has only one class of stock. The shareholders must meet certain requirements, stocks owned by a husband and wife are treated as one, but once they are separated, than the stock will be counted as two. This plays an important factor in the rule that stocks may never exceed 75 in quantity. The individual must be a US citizen or a legal resident alien, to prevent intentional violations of this, S Corporations can restrict share transfer through buy-sell agreements and first-refusal rights.

The most attractive feature of an S Corporation is that the entity itself is not taxed. Shareholders are the only ones taxed. There are exceptions to this rule, however, the vast majority of the S Corporations never encounter such situations. The S Corporations generally compute net income and gains, as well as losses, as that of partnerships. Most decisions used to determine the amount of income are made at the corporate level rather than by shareholders.

Those shareholders working for an S Corporation, qualify as employees. The corporation can deduct salaries, as well as payroll taxes, paid to and on behalf of these individuals. No self-employment income passes from an S Corporation to its shareholders. Salaries are the only items subject to employment taxes. S Corporations are sometimes tempted to under compensate employees to avoid Social Security and other payroll taxes.

S Corporations are rarely subject to income tax, they must compute their taxable income like individual taxpayers. The gross income of an S Corporation shareholder includes his or her proportionate share of the corporation's gross income. Once the corporation identifies and measures the relevant items of income, deduction and credit, these items are passed through to shareholders to be reported on their own returns.

Each shareholder's share of net losses may not exceed his or her basis in the corporation. The shareholder's basis is generally his or her investment in the corporation plus any undistributed accumulated income. Any losses exceeding the shareholder's basis may be carried forward indefinitely; to be used when the shareholder's basis is increased. When basis is insufficient and there is more than one item that reduces basis, the flow through of each item is determined in a prorated manner. Any items increasing basis flow through to the owner before items reducing basis.
S corporation distributions often include accumulated income previously taxed to the shareholder, which is included in his or her basis thus, distributions are typically considered nontaxable to the extent of the shareholder's basis. For businesses that have always been S corporations, this always holds true. When distributions exceed a shareholder's basis, the recognition of capital gain is generally avoided by having the shareholder increase his or her stock basis before the year ends. This is generally accomplished by having the shareholder either contribute capital or lend money to the S corporation. Realized gains, but not losses, are recognized on the assets S corporations distribute shareholders. These gains are passed through to shareholders.

Those shareholders who own more than 2 percent are treated like partners. Fringe benefits requiring employee status are considered compensation. These benefits are deductible by the corporation and are subject only to income taxes. They are not subject to FICA or FUTA, unlike a partnership. While the more than 2 percent shareholder is required to include the benefit in income, he or she is also entitled to treat such benefit as if he or she paid for it. Thus, in the case of medical insurance premiums paid by the S corporation, the shareholder is entitled to a partial deduction of his or her cost as a deduction above the line. In addition, the shareholder may claim the balance as an itemized deduction subject to a 7.5 percent floor.
Before the enactment of the Small Business Job Protection Act of 1996 (SBJPA 96), an S corporation was limited to owning less than 80 percent of another corporation's stock. Today, S corporations may own 80 percent or more of the stock of C corporations. This gives them a better opportunity in investing in the stock market.
Although those shareholders working for an S Corporation qualify as employees; those people who working for, use products, supplies or services from, own and control a cooperative.
The cooperative as a form of business organization began during the Industrial Revolution. Cooperation, that is, people working together for their mutual benefit, has been practiced throughout human history. Cooperatives were useful for promoting the interests of the less powerful members of society. Farmers, producers, workers, and consumers found that they could accomplish more collectively than they could individually. Cooperatives vary in type and membership size, all were formed to meet the specific objectives of members, and are structured to adapt to member's changing needs. Self-reliance and self-help are the hallmarks of cooperatives.
A cooperative is a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use. The user/owners are called members. The members benefit from the cooperative, in proportion to the use they make of the cooperative, in two ways. First, the more they use the cooperatives, the more service they receive. Second, earnings are allocated to members based on the amount of business they do with the cooperative.
In some ways, cooperatives resemble other businesses. They have similar physical facilities, perform similar functions and must follow sound business practices. They are usually incorporated under state law filing articles of incorporation, granting them the right to do business. The organizers draw up bylaws and other necessary legal papers. Members elect a board of directors. The board sets policy and hires a manager to run the day-to-day operations.
But in many ways cooperatives are distinctly different from other businesses. These differences are found in the cooperative's purpose, its ownership and control, and how benefits are distributed. They are reflected in cooperative principles that explain the unique aspects of doing business on a cooperative basis.
There are many different cooperatives: Agricultural cooperatives help producers assure markets and supplies, achieve economies of scale, and gain market power through jointly marketing, bargaining, processing, and purchasing supplies and services. Arts and crafts cooperatives help artists and crafts persons maximize their earning potential and working conditions. Business cooperatives help small enterprises cut expenses and add member services through joint purchasing and marketing. Childcare and preschool cooperatives provide high-quality enrichment and educational programs for children and their families.
Credit Unions provide at-cost financial services to a wide cross-section of the population. Food cooperatives and buying clubs gain access to healthy, affordable commodities using a consumer-directed approach. Housing cooperatives offer ownership options for Californians from all income groups. Insurance cooperatives operate much like retail cooperatives except that they provide insurance services instead of consumer goods. Retail cooperatives sell consumer goods to members as well as non-members. Student cooperatives are set up and run by students to meet specific needs. Utility cooperatives provide utilities such as communication services, electricity, and water to their members. Worker cooperatives create employment opportunities and provide the benefits of ownership to members.