C-Corporation

The concept of a C-corporation is to issue earnings to shareholders. This type of entity pays tax on the earnings at the corporate rate.  The excess profits are dispersed to the shareholders as “dividends”, The dividends are treated as investment income and taxed to the shareholder. This is how a C-corporation receives a “double taxation”.

 C-Corporations tax-related advantages:

The division of income between the corporation and its shareholders is called “Income Splitting’ This is also an alternative to lower overall taxes. This method can circumvent or considerably decrease the likely impact of “double taxation.”

Consult with a knowledgeable tax accountant to determine the ideal salary the corporation should pay you as an employee to ensure the lowest tax bill at the end of the year;

C-Corporations enjoy a wider range of deductible expenses such as those for healthcare and education;

A shareholder can borrow up to $10,000 from a C-Corporation, interest-free. These tax-free loans are not accessible to sole proprietors, partners, LLC members or S-Corporation shareholders.

S-Corporation

As an S-Corporations, income is passed through to the shareholders who pays taxes on that income based on their individual income tax rates. The following qualifications must be met to be approved for S-Corporation status:

 -The corporation must have less than 100 shareholders

-All shareholders must be individual U.S. citizens, resident aliens, other S-Corporations, or an electing small business trust; the corporation may have only one class of stock; and all shareholders must consent in writing to the S-Corporation status.

-The S-Corporation election tax treatment eliminates any likelihood being “double taxed”

-S-Corporations pay no federal corporate income tax, but must file annual tax returns. The business losses are also passed through which means that shareholders who are active in the business can file most business operating losses on their individual tax returns

-S-Corporations must file and pay employment taxes on employees. An S-Corporation may not retain earnings for future growth without the shareholders paying tax on them. The taxable profits of an S-Corporation are passed through to the shareholders in the year earned

-S-Corporations cannot provide the full range of fringe benefits that a C-Corporation can.

  The Limited Liability Company

A limited liability company consists of one or more owners (called “members”) who actively manage the company’s business affairs.  LLCs are relatively simple to establish and operate, with minimal annual filing requirements in most jurisdictions.

LLC’s enjoy many tax-related advantages:

 -LLC members share in the profits and in the tax deductions of the limited liability company while limiting the potential financial risks;

-The IRS treats the limited liability company as a pass-through entity, the profits and losses of the company pass directly to each member and are taxed only at the individual level;

-The members of an LLC have flexibility in dividing the profits and losses. In a corporation or partnership, profits must be divided according to percentage of ownership. However, with an LLC, special allocations are permitted, so long as they have a “substantial economic effect” (e.g. they must be based upon legitimate economic circumstances, and may not be used to simply reduce one member’s tax liability).