Got a business? Then the best business structure for you is likely going to be a corporation. There will be less tax and you’ll have a lower risk from audit. You could also have an LLC (limited liability company) that then elects C or S Corp status. For the purposes of the blog today, that would count as a corporation as well.
There are two different types of corporations: The C Corporation and the S Corporation.
The biggest difference between the two is that the S Corporation is a flow-through entity. That means that the income or loss that you have through the business is reported on a Schedule K-1 as part of the S Corporation return. The numbers on the Schedule K-1 are then included on your personal return. The taxable income has nothing to do with the amount of distributions you’ve taken out of the company. It is based solely on what the profit or loss is on the S Corporation.
A C corporation files a tax return and pays tax based on its income. You don’t report any of the C Corp income on your personal tax return.
A C Corp can offer better benefits to the shareholder/employee than an S Corp can. For example, an S Corp cannot take a deduction for medical insurance paid for a shareholder/employee. A C Corp can not only take the deduction for medical insurance but can also offer a MERP (medical expense reimbursement plan) which reimburses employees (including shareholders) for all out of pocket expenses.
So now let’s get to the strategy part. Who should have an S Corp and who should have a C Corp?
We usually use S Corporations for US residents who have income that is less than $100,000 and/or are professionals. C Corps work best for people who have higher income and/or are interested in benefit plans.
There are a lot more rules, such as who can own an S Corp (only US residents and/or US citizens and must be individuals) and penalties for certain circumstances with the C Corp (personal service corps, personal holding corps and others).
Business Structures aren’t one-size-fits all, no matter who says they are. The right one will save you money. The wrong one will cost you money. It’s all a question of knowing the right structure for your business. Download today!