What is Better C Corp or S Corp for tax purposes?
An S corporation does not pay federal income tax as an entity on its income. Instead, all income items are passed through to shareholders and taxed at the shareholders’ individual tax rates. Avoidance of a C corporation’s perceived “double taxation” is a primary advantage to electing
S corporation status. (Double tax can be avoided by bonusing away the profit to employee/shareholders) However, unlike a C Corporation, an S Corporation’s income is taxable to shareholders when earned, whether or not the corporation distributes the income to them. Typically, the C Corp shareholder receives a W-2 to report their income on their personal income tax return. Alternatively, the S Corp shareholder receives a K-1 to report their income on their personal income tax return. Although a C Corporation can only use losses to offset corporate income (plus any carryover amounts), S corporation shareholders can generally use corporate losses immediately to offset income from other sources, subject to at-risk and passive activity rules. S corporations also offer the advantage of the same limited liability protection as C corporations and limited liability companies (LLCs).
C Corp Or S Corp for Setting Up a Business
Because an S corporation has a unique tax structure, it is important for S corporations and their shareholders to understand the S corporation qualification requirements, the distribution and loss limitations, as well as how and when items of income and expense are taxed. You probably feel a little confused or somewhat unsure as to what this may all mean. Or, how all these alternatives might be best utilized in your situation. Call us to arrange an appointment to discuss which is right for you.