Applied Business Law

Northwest Brands, Inc., is a small business incorporated in Minnesota. It's one class of stock is owned by twelve members of a single family. Ordinarily, corporate income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this double-income taxation? Explain your answer. I believe so, the Northwest Brands can stay clear from double-income taxation by electing to be treated as an S corporation. “To qualify for S Corporation status, a corporation must be a domestic corporation, have only class of stock, have less than 100 shareholders, and all shareholders must be trusts, estates, or individuals. Ordinarily, all income of a corporation is taxed at the corporate level and any distributions of income (dividends) to the shareholders are taxed at the individual level. In an S corporation, income is not taxed at the corporate level for federal purposes. Rather than being taxed at the corporate level, the corporate income of a S Corporation flows through to the individual shareholders income tax return and is taxed at the individual level. Income is passed through in proportion to ownership percentages . When a shareholder takes a distribution of income, in most cases, it is not considered taxable income since the individual has already paid tax on it. S corporation distributions will only become taxable if an individual's distributions exceed his or her stock or debt basis. Stock basis includes consideration paid for stock as well as the individual's share of accumulated earnings and profits. Debt basis is created by loaning money to the company. For Minnesota state purposes, there is a corporate income tax of 9.8% on corporate