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Which entity offers the best tax advantages?

There are two main types of corporations the S-Corporation and the C-Corporation.

Every corporation is considered a C corp when it is formed with the Secretary of State. The distinction is made on a federal level and processed by the IRS.

Corporation that want to be taxed a small business corporation file a form with the IRS called Form 2553 and will file their taxes using 1120s tax return. Corporations that do not file this form are taxed as traditional corporations and file the 1120 tax return.

A C-corporation file a corporate tax return and will pay taxes on the profits. The post tax income may then be distributed to the corporation shareholders in the the form of dividends. The shareholders are then taxed on dividends, which effectively forces the ownership of a corporation to pay taxes on the same earnings twice- once at the corporate level, and then as individual level. This is what is known as “double taxation.”

An S-Corporation is similar to a Limited Liability Company in the sense that the profits of the company flow directly to the shareholders this is known as pass through taxation. The profits of the S – Corporation are distributed proportionally to share percentages.

Tax Advantages of an S – Corporation:

  • Ability to limit self-employment tax which can result considerable self employment tax savings.

Pass-through taxation allows the profits of the company to flow directly to the ownership and only be taxed once.

Tax Advantages of a C-Corporation:

  • The corporate tax rates are typically lower than personal income tax rates.

Because corporate tax rates are lower companies that have retained earnings can take advantage of the lower rates.

Limited Liability Companies (LLC)

The LLC like the S – Corporation provides for pass through taxation. The LLC is considered a disregarded entity and its tax treatment depends on the number of members. A single member LLC is taxed as sole proprietorship while a LLC with more than one member is taxed a partnership. A very unique advantage of the LLC is that it can elect to be taxed as S-Corporations or even a C – Corporation if it chooses.

Tax Advantages of the LLC:

  • Multiple options in terms of taxation.

Extremely flexible in how it chooses to distribute profits which allows owners to distribute profits or losses in ways that are advantageous to their tax situation.

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