PRIMER – S corp cf. C corp

S corp cf. C corp

 

S Corporation — Benefits and Detriments: Some of the key tax benefits of operating as an S corporation are:

1. The profits are not subject to federal taxation at the corporation level (i.e., no double taxation) as compared with a C corporation that subjects profits to taxation at the corporation level.

2. As an S corporation, profits are not considered to be self-employment income that would be subject to self-employment taxation as compared to a sole proprietorship or limited liability company (LLC) taxed as a sole proprietorship or as a partnership.

3. There is less pressure at year-end to determine the net profit than there would be if the corporation was taxed as a C corporation.

4. If the shareholder is actively managing the S corporation, the profits distributed on a Schedule K-1 are not considered to be “net investment income” subject to the relatively new “additional net investment” tax.

Some of the key tax detriments of operating as an S corporation are:

1. An S corporation shareholder holding more than two percent of the outstanding shares has a limited ability to deduct certain “fringe benefits” benefitting the shareholder.

2. An S corporation can have only one class of stock; this is a tax requirement rather than a tax problem. However, having only one class of stock limits flexibility in bringing in coowners, as compared with a C corporation or LLC taxed other than as an S corporation.

C Corporations — Benefits and Detriments:

1. Shareholders have a greater opportunity to get a tax benefit from their fringe benefits.

2. C corporations that have net profits are taxed at the corporation level and again at the shareholder level if dividends are paid (i.e., double level of taxation on the same profits).

3. If a corporation is a personal service corporation (PSC) it potentially is subject to a higher federal income tax rate than non-PSC C corporations. Accordingly, the practice of “zeroing out” profits at the end of the year becomes even more important.

Converting From an S Corporation to a C Corporation: An S corporation can elect to revoke its S corporation election at nearly any time. If it does:

1. The corporation defaults to being taxed under Subchapter C of the Internal Revenue Code.

2. There may or may not be a tax on the transition called “built-in gains” tax.

 

Limited Liability Company.

1. LLCs can elect to be taxed as a sole proprietor (if there is only member), as a C corporation, as an S corporation, or as a partnership (if there is more than one member).

2. If the LLC is taxed as a sole proprietorship or partnership, all profits would be subject to the self-employment tax and possibly the relatively new 0.09 percent, additional Medicare tax.

3. There are no current tax benefits available to forming an LLC rather than a corporation if the entity intends to elect to be taxed as an S corporation or C corporation.

4. If the member is actively managing the LLC taxed as a sole proprietorship or partnership, the profits distributed on a Schedule K-1 are not considered to be “net investment income” subject to the relatively new “additional net investment” tax.

 

 

 

 

Copyright © Keith B. Baker, 2015