Small Business Reading Room

Wednesday, July 26, 2006

S Corporations - Their History and Challenges

This is a pretty good summary of where we have been, where we are, and where we want to be...

As recorded from last month's testimony of Thomas M. Sullivan (Chief Counsel for Advocacy U.S. Small Business Administration) to the U.S. House of Representatives Committee on Small Business Subcommittee on Regulatory Reform and Oversight about the history and challenges of S Corporations:

S-corporations were created in 1958. They were developed to enhance entrepreneurial activity and to eliminate the negative effects of double taxation experienced by taxable corporations (C-corporations).(7) C-corporations are subject to double taxation because the corporation itself is liable for income tax on its earnings, then when dividends are distributed to the shareholders the shareholders must pay income tax on those dividends. To receive favorable tax treatment, entities electing S status must adhere to many restrictions, including:

  • the number of shareholders,

  • type of shareholder,

  • class of stock, and;

  • domesticity requirements for S-corporation elections.

In the half century since the creation of S-Corporations, the U.S economy and the world's economies have changed. With the advent of technology, globalization of the economy has become more of a reality.

Policymakers considering changes to tax policy must take a broader view that includes tax policies around the world. To ensure America's entrepreneurs remain competitive, in a global marketplace, we must adopt tax policies that remove barriers to their success.

S-Corporations are a large segment of the U.S. economy. To ensure their continued success H.R. 4421, the "S Corporation Reform Act of 2005," (pdf) was introduced by Congressmen Clay Shaw and Jim Ramstad.

The legislation is intended to reform the provisions that control S-Corporations so that S-Corporations can reach their full potential. H.R. 4421 contains provisions that are advocated and supported by the American Institute of Certified Public Accountants and others.

A note regarding H.R. 4421-

This bill is in the first step in the legislative process. Introduced House Bills go first to House committees that consider whether the Bill should be presented to the House as a whole. The majority of Bills never make it out of committee.

Introduced: Nov 18, 2005
Last Action: Nov 18, 2005: Referred to the House Committee on Ways and Means.

All you S Corp owners may want to contact your congressperson or senator and tell them how you feel about H.R. 4421.


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