Corporations Defined: Self Employed Borrowers

A corporation (also known as a C corporation) is a state-chartered legal entity that is owned by its shareholders and that exists separately from its shareholders. The company itself can sue, be sued, hold and convey property, and enter into contracts in the corporation’s name. In addition, a corporation does not dissolve when its ownership changes. There are two types of corporations—large, publicly owned corporations and privately owned (closely held) corporations.

Shareholders Of Corporations

Shareholders are not responsible for the day-to-day operation of a corporation; instead, a company’s board of directors manages the company and delegates responsibility for the day-to-day operations to the directors and officers.

Corporations must file corporate income tax returns and report income and losses on IRS Form 1120. Corporations distribute profits to shareholders in the form of dividends, which are reported on IRS Form 1099-DIV. The shareholders must then report the dividends as income on their individual IRS Form 1040. In addition, owners and others who work for the company are paid wages and must report them on their individual tax returns.

What Are S Corporations: Self Employed Borrowers

A Subchapter S corporation is a small business with a limited number of shareholders (no more than 100 shareholders are permitted) and only one class of stock. The corporation elects not to be taxed as a regular corporation. Instead, business gains and losses are passed directly to the shareholders, who include their pro rata share of capital gains, ordinary income, and other taxable items on their personal income tax returns.

Each shareholder in an S corporation reports his or her share of the income on IRS Form 1120S, Schedule K-1. One advantage of an S corporation is that double taxation is avoided.

The mortgage industry considers any person with a 25 percent or greater ownership interest in a business to be self-employed.

What Are Independent Contractors?

A final category of self-employed individuals to be aware of includes independent contractors. People such as accountants, bricklayers, translators, and others who are in an independent trade, business, or profession in which they offer their services to the general public may work as independent contractors. However, for legal purposes, whether a person is an independent contractor or an employee depends on the facts of each case. Sometimes the determination of whether a person is an independent contractor or an employee can be tricky. The general rule is that an individual is an independent contractor if he or she has the right to control or direct only the result of the work, as opposed to what will be done in the work and how it will be done.

Employer Versus Employee

A person is not an independent contractor if he or she performs services that can be controlled by an employer, that is, what work will be done and how it will be done. The distinction is that when an employer controls how services are performed, the worker is an employee. When an employer controls only the result of the work, the worker is an independent contractor.

In addition, independent contractors will receive an IRS Form 1099 from the companies with whom they work, which reports the amount of income paid to them over the course of a year. An employee’s wages, in contrast, are reported on a Form W-2 for tax purposes.

The following chart summarizes the characteristics of each business type, along with how business income is reported and taxed, and the advantages and disadvantages of doing business under each structure.

Gustan Cho Associates

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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