The Flow-Through Model Approach

Please reply to the below discussion in 2 paragraphs. In the first, clearly state with which parts of the other student’s thread you agree or disagree. You must provide an explanation for why you agree or disagree with the other student’s thread. In the second, add some additional comments of your own that add to the discussion.  the reply must be at least 250 words.

An S corporation is one of two tax classifications under the corporation entity, the other being a C corporation. The difference between the two is that the S corporation is a flow-through entity. A flow-through entity is one where the owners and investors receive the income of the business. This means that instead of taxing the income once for the business and then another time once distributed to everyone, the income is taxed once as the money is given to owners and investors. The flow-through model allows for those who work and invest in the business do not have to deal with double taxation. Another advantage of an S corporation is that the owner’s assets are protected. This means if something goes wrong and the corporation cannot pay their debts, the creditors cannot come after the owner’s personal assets. The owner does not need to worry about losing his house or car because of a bad business year.

One of the big disadvantages of S corporations are the strict requirements that have to be met before a corporation can be considered an S corporation. One of these requirements is that the corporation has a limit of 100 shareholders (Spilker & Ayers, 2021). To make it simple, whole families and their estates can count as one shareholder (Spilker & Ayers, 2021). Another requirement is that only a select few U.S. citizens, residents, estates, certain trusts, and certain tax-exempt organizations may be shareholders (Spilker & Ayers, 2021). Also, at any point if the corporation is not meeting the requirements the S corporation classification will be terminated immediately. I assume, these specific requirements are so strict so that not just any corporation can reap the tax benefits of being an S corporation. Another disadvantage is how profits and losses are allocated among shareholders. Both profits and losses are allocated based on percent of ownership. So, if I own half of all the shares, I take on half of the losses incurred by the corporations. This is primarily a huge disadvantage for shareholders with large amounts of shares during periods with huge losses.

I think integrating a Christian worldview, the most important thing to consider is if the decision to be classified as an S corporation is wise. The Bible says in Ephesians 5:15 “Be very careful, then, how you live – not as unwise but as wise” (NIV). It is easy to get caught up in the fact that the S corporation is a flow-through entity and so there are tax benefits to being classified as one but is the S corporation right for your company. There are also consequences to being classified as an S corporation and business owners need to consider these before making a decision. It is easy to make a decision while only looking at the pros of the outcome. Also, there are many requirements to being classified as an S corporation and I think it is important as Christians that we honestly look at our company and say do we check off all the requirements of this classification. It would not be ethical to bend the rules just for a couple tax benefits.

References

New International Version Bible. (2011). Zondervan. (Original work published 1978)

Spilker, B. C., & Ayers, B. C. (2021). Mcgraw-hill’s taxation of individuals and business

entities. Mcgraw-Hill Education.


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