A personal service corporation, also known as a corporation that specializes in personal services, is an entity that offers a unique line of products or services. This line of services is usually not allowed to take on more than one customer. But, the corporation can still offer different types of services to a single customer, and charge a flat fee for those services.
These types of entities are considered pass-throughs by the Internal Revenue Service because they do not operate like a business. A corporation must file a form called an “in general” with the IRS before it can become self-employed. The form lets the company state who pays for the benefits and what kind of services are offered. In order to be legitimate, personal service corporations must have the same or similar qualifications as traditional corporations. These qualifications include a qualified written notice of intent, a qualified board of directors, and a qualified written statement from a person with financial expertise that certifies the corporation meets all the necessary requirements.
Because these types of businesses are considered pass-through entities, business owners need to be aware of their rights and responsibilities when dealing with them. This is where corporate taxation comes into play. A corporation cannot pay any Federal or State taxes, unless it has an actual seat in a State, and no public shareholders. However, some small corporations have what is known as a private share listing. This allows them to take on more employees, increase profits, and pay themselves off as their profits exceed a set limit.
The next step to what is a personal service corporation? When owners test the qualifications of a corporation they can petition to have their corporation granted the status of a pass-through entity. This is very different from what is a C corporation. A pass-through entity is not subject to taxation. The corporation may file for an exception from the IRS every single year it is in operation, but if the corporation never actually files an income tax return the IRS will not be notified.
Another common question about what is a personal service corporation is the testing period for determining if an individual or group of employees qualify for the corporation’s tax status. To qualify for a C corporation, individuals must own at least 50% of the shares and have a fair market value (appraised value) of the shares at the end of the taxable year. Individuals who do not qualify for this classification are referred to as ‘pass-through’ shareholders. They will pay taxes on the benefits they receive from the corporation, just as they would if they were employed by an employer, but the individual is not entitled to receive dividends or be paid by an employer’s insurance plan.
When it comes to what is a C corporation, one must meet the following requirements: the corporation must be open and not doing business under its own name; it must meet all of the requirements set forth in its articles of organization. An in-house test period occurs after two years of continuous trading. The test period is then extended each subsequent year until it expires. If a corporation does not qualify for the designation as a C corporation, it may become a disregarded entity and be subjected to the net profits and losses test under IRC Sections 461 and 4 62. If the corporation fails to meet the requirements for a C corporation designation, it will become a disregarded entity and its assets will revert to the test score of its last owner.
While these requirements for what is a personal service corporation present an administrative hassle for most small business owners, there is relief in sight. Two years after being disregarded, a personal corporation can re-qualify as a C corporation by re-forming under the new laws. For most small business owners, re-registration of a corporation takes less than a year from the date of dissolution. A new secretary, reporting guidelines, and shareholders meetings can immediately commence.
What is a personal corporation presents an excellent choice for businesses looking to incorporate but who want their liabilities and taxes reduced. The corporation will not be subjected to the corporate income tax or payroll taxes that regular businesses pay. However, corporation members cannot use their assets or other assets to create or benefit other owners. Only employee-owners must meet the direct ownership requirements in order to be classified as owners of the corporation.