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C Corporation or S Corporation

by Roger on September 9, 2012

in Administrative

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So you decided this new or existing  business of yours is going to be a corporation. You’ve done all the research and feel a corporation is better for you than a limited liability company.  Next question you face is whether to be a C corporation or an S corporation. It’s extremely important that you weigh the positives and negatives of both before deciding. I’ve seen many businesses rush to a decision only to regret their choice down the line.

First line of thought has to be the tax implications of both. An S corporation is much like a partnership in that it is a pass- thru entity and is not taxed itself as a C corporation is. There are certain situations where an S corporations are subject to tax but we won’t discuss this here. The C corporation files a Form 1120 with the IRS and pays taxes on any profits. The S corporation files a Form 1120S with the IRS and any profits or losses are passed on to the shareholders using what’s called a K-1 form.  Keep in mind there are limitations depending on ownership percentages and  stock and loan basis.

Another concern is a concept called “double taxation”. A C corporation is taxed, unlike the S corporation, on its profits itself. Any dividends passed thru to the shareholder are then taxed again. The S corporation eliminates double taxation. Another requirement of the S corporation is that corporate officers are considered employees and must be treated as such in regard to pay, withholding, and other terms of employment. Salaries corporate officers receive must be reasonable in respect to the industry and the services performed. Of course any other distributions are not subject to self-employment tax.

There are many factors which need to be considered when selecting the type of corporation you wish to be. There are numerous regulations within the tax code to be considered and one must not forget the state they are incorporated in. Each state, for the most part follow IRS regulations, but many also add in their own twists.  Again, we have only touched on some things that need to be considered. If you’re not sure, we encourage you to consult a professional.

About the Author

Roger

Roger Forte holds an MBA in accounting and has been working with small businesses (and their tax matters) for over 35 years. Mr. Forte is a consultant with Speedy Incorporation and LLC, advising on incorporation and LLC formations. He also serves as the lead blogger on all things relating to accounting for small business on the Speedy Small Business Blog.

 

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