Why be a C Corporation? Or an S Corp, or an LLC or a Partnership or even a Proprietorship or any other kind of legal entity? What difference does it make? What’s everyone else doing? While you can look up many pros and cons of all types of business formations, here’s my personal thoughts on each and my recommendation. And my recommendation is be an S Corporation unless there’s a specific reason not to do so.
Why are we a C Corporation? The answer most often is “because my accountant said I would pay less in taxes.” While no one is thrilled about paying taxes, you need to go beyond that to understand why you would pay less in taxes for, in the long run, it can cost you more. And you need to review the decision yearly because circumstances change.
Differences in the C Corp and S Corp Legal Entity
The C Corp pays two levels of income tax – first a corporate income tax on earnings and then the stockholders pay personal income tax when they take the money out in either wages or dividends. The S corp is a pass through entity, meaning it passes its taxable income or loss directly through to the owner, avoiding double taxation.
Therefore the cash coming out to the owner will be taxed at a higher rate within the C Corp because the owner pays BOTH the corporate income tax rate PLUS the personal income tax rate. And to add insult to injury, dividends paid by the C Corp to owners are not tax deductible; instead they are a distribution.
Contrast That to An S Corp.
S Corp is a “pass through” entity. The overall effect is the corporation is taxed similar to a partnership. While you file a corporate tax return, the income passes through to the personal tax returns of the owners to be taxed at the personal rate and avoiding the double taxation as in a C Corporation.
Why Not be an S Corp?
Why Not be an LLC?
Why Not be a sole proprietor or a partner?
I am saying, again, that if you are not an S Corp, there should be a specific reason for it. And it is you, who should know the reason why and be able to articulate it in general terms. Otherwise, you may just be doing something this year just like it was done last year, just like we did the year before that. So review your status every year because it changes.
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