Anyone who owns a business has been confronted with the age old question of using a C-Corp or an S-Corp.
The corporation is very well established and should be considered for tax reduction purposes (could also be an LLC taxed as a Corporation). Unfortunately for asset protection purposes the corporation is easily penetrated by creditors and should not be used to hold significant assets. (See our asset protection section for discussions on legal entities that protect assets)
When filing with the IRS you will be required to specify how the corporation will be taxed, S or C (some states require professionals to use a P-Corp). Some of the advantages and disadvantages are discussed below:
C-Corporation (Taxed at separate tax rates)
Advantages
- Lower tax brackets
- Fiscal year planning
- Substantial medical, dental, and vision deductions under section 105
- Section 179 deductions on business equipment
- Meals, travel, lodging, entertainment deductions
- Life insurance, disability insurance
- Pension plans
Disadvantages
- Separate tax return requirements with a possibility of double taxation
- Required paperwork for minutes, meetings and resolutions
S-Corporation (Considered a flow-through entity for federal tax purposes)
Advantages
- Losses flow through to individual shareholders offsetting income in the current year
- Avoids double taxation
- Not subject to personal holdings tax or accumulated earnings tax
- Generally no corporate tax on liquidation or sale of corporate assets
Disadvantages
- Shareholders are subject to tax on profits (even if funds are not distributed)
- Limited to 75 shareholders
- Generally only persons or select trusts may be shareholders
- Shareholders names must be revealed to the IRS
- Must be a calendar year taxpayer
- Limited tax deductions
As you can see the C-Corporation has several more deductions than the S. W2 employees with a small business could consider the S-Corporation as it may be sufficient because you may not have many of the medical, dental and insurance costs of full time business owners.
The C may be more complicated when it comes to meetings and paperwork, but the savings can far outweigh the costs. The available deductions in the C-Corporation are significant and you should consider making an appointment with your accountant to weigh your options.
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Tax Advice Disclosure: To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax strategies contained in this communication (including any attachments), unless otherwise specifically stated, was not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.