Selecting a corporate entity type can impact how much you pay in taxes and how attractive your business is in its ability to raise capital. The experienced tax attorneys at Moskowitz LLP can give you key advice about which choice may work best for you.
Different corporate forms have varying tax treatments from the IRS and state tax authorities, such as the California Franchise Tax Board (FTB). One of the key tax aspects that you need to be aware of is the potential for “double taxation”. Certain entities that are treated as a “pass-through” (Limited Liability Companies and S Corporations) could minimize tax obligations. As such, know that each business entity comes with its own consequences that you must consider. Saving money on taxes should not be your only consideration.
To learn more about how your corporate form affects your tax obligations, schedule an appointment to speak with a tax attorney at Moskowitz LLP. Call our legal team at 888-829-3325. We can review your business goals and provide you with strategic legal advice.
What Corporate Forms Can I Choose for My Business?
When you are considering which business entity to choose for tax purposes, you must consider several factors. There are multiple options you can choose, including the following:
- S Corporation (S Corp) – This is a pass-through entity where the profits and losses are passed through to the individual shareholders
- C Corporation (C Corp) – This is corporate entity where the tax obligations of the entity are separate and distinct from its shareholders (i.e. profits are not passed through to the personal income tax level)
- Limited Liability Company (LLC) – This entity can be taxed as a partnership, S Corp or a C corp, and the individual members enjoy protection from personal liability for business debts, etc.
Why an S Corp Can Be Advantageous
Owner-operated businesses may prefer the tax treatment of an S Corp. The main tax advantage an S Corp offers is S Corp profits flow through to the shareholders of the business and thus taxed at the personal income tax level. As a result, the S Corp profits avoid the corporate level tax. In a C Corp, you must pay taxes at the corporate level. Any income passed down to you as a shareholder (such as dividends) is taxed at the personal level. Thus, you would be effectively paying tax twice on the same income. Also note corporate income tax is taxed at state levels as well.
Additionally, S Corp shareholders can take a distribution of the profits tax free, subject to some limitations. Tax free distributions of profit also are not subject to additional self-employment tax unlike business entities like a partnership.
There are also California-specific reasons why you may save more money in taxes for an S Corp. The state tax rate is lower for an S Corp, as they pay 1.5% of their net income, as opposed to the 8.84% C Corps pay.
Why You May Want to Select a C Corp
Although an S Corp can lead to more favorable tax treatment, there may be valid reasons why you would choose a C Corp as your entity. Much depends on the size of your company and your growth objectives. While an S Corp may minimize your tax liabilities, a C Corp can help facilitate growth in that it may be more attractive to potential investors as IRS S Corp structure limitations are often a deterrent to investor money. In other words, you need to consider more than just how much you can save on your taxes.
In addition, the headline tax rates that S and C corporations pay may not be the only consideration for your business. Even though a C Corp may have higher tax rates, there may be other benefits that can save you money. For example, a C Corp may retain earnings over time. You do not owe extra income taxes on the revenue earned by the C Corp.
How Is an LLC Treated for Tax Purposes?
An LLC can be taxed like a partnership, C Corp or S Corp. LLCs have the benefit of personal protection from corporate debts, but you can also obtain some of the favorable tax treatment of an S Corp. However, LLCs, if taxed like a partnership, require you to pay self-employment taxes unlike the tax treatment of an S Corp.
Contact a Tax Law Firm Today
When your business needs tax law advice, speak to the experienced tax lawyers, CPAs and enrolled agents at Moskowitz LLP. You can schedule time to speak with a lawyer today by visiting our website or by calling us at 888-829-3325.