Starr Cardio, Inc., is a small business. Ted, Uma, and eleven other members of the Starr family own all of its stock. Currently, Starr's income is taxed at the corporate level and, after being distributed to the family members, at the shareholder level. Can Starr retain its corporate status but otherwise avoid this double taxation? If so, how?
What will be an ideal response?
Starr can re-form as an S corporation to avoid this double income-taxation. S corporations were created specifically to permit small businesses to avoid this sort of taxation. Any small business that meets certain requirements can qualify. The requirements are (1) the firm must be a domestic corporation, (2) the firm must not be a member of an affiliated group of corporations, (3) the firm must have less than a certain number of shareholders, (4) the shareholders must be individuals, estates, or qualified trusts (or corporations in some cases), (5) there can be only one class of stock, and (6) no shareholder can be a nonresident alien. Based on the facts presented in this question, it would appear that Starr would qualify.
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