Considering incorporating your business? There are many benefits to incorporating your business these days, but one of the first things you’ll have to decide is which entity is right for you.
To help start your decision-making process, we’ve compiled an easy break down of two different corporation types—s-corps and c-corps—as well as the tax advantages of each:
What is an S-Corporation?
An S-Corporation’s profits, losses and other tax items pass through to the business owner and are reported on their personal tax return.
Like a sole proprietorship, each individual shareholder of the S-corp is subject to their own individual tax rate on the income passed through to them.
What are some of the tax advantages of S-Corps?
From a tax standpoint, there are a few reasons why some business owners choose an S-Corporation as their entity type including:
No Corporate Tax
Because S-corps are a pass-through entity in terms of income tax, they avoid the corporate income tax, avoiding the “double taxation” that can occur with C-Corporations.
Lower Risk of Audit
S corporations file an Informational Tax Return (Form 1120 S) that faces a significantly lower audit risk than corporations who Schedule C- Profit or Loss from Business (Form 1040).
Potential for Less Self-Employment Tax
S-Corps have the potential for less self-employment tax, from what you pay as a sole proprietor.
What is a C-Corporation?
Unlike the S-corp, the C-Corporation is not a pass-through entity. Instead, corporate profits are distributed to the business owners in the form of dividends. Business owners then pay personal income tax on these dividends.
For this reason, a C-Corporation can be subject to “double taxation” as the corporation is taxed as well as the business owners.
What are some of the tax advantages of C-Corps?
Even though the C-Corporation is a more complex and demanding business structures, there are a few tax reasons why some business owners prefer the C-Corp as their entity type:
Unlimited Number of Stockholders
C-Corporations can sell shares to a large amount of investors, allowing for a quicker increase in funds and greater tax-planning options
They Can Provide Benefits
C-corps can provide significant healthcare and medical benefits, as well as other benefit programs for education, life insurance, transportation costs and more.
It’s Easier To Sell
Ownership is easily transferable in C-corps through the sale of stock.
Flat 21% Tax Rate
This can potentially be lower than what you were paying before under other entities.
Foreign Owner
With C-Corps, you are allowed to have a non-resident alien as owner.
Need Help Deciding Which Corporation Type is Right For You?
Call us today at (818) 242-4888 or schedule your free 30-minute consult now. Robert Hall & Associates is a leading corporate and business tax preparer and consultant serving Glendale, Burbank, Pasadena and the Greater Los Angeles area. Our team of enrolled agents can guide you through the business formation process and advise you on how to prepare for upcoming filings.
