Which Entity is Right for You?

Author: Keith Huggett

When forming a new company, you want to get it right the first time. This is why it's so important to select the right type of entity. If you have decided that a corporation is the right path, you need to determine which type of corporation makes the most sense: S Corporation or C Corporation.

A C Corporation is basically the designation the IRS gives to regular corporations. The profits of these corporations are taxed, as well as the dividends to shareholders, sometimes resulting in double taxation. If you want to avoid this situation, an S Corporation may be a better option. In an S Corporation, the business itself is not taxed, but the shareholders are. 

In addition to avoiding double taxation, there are several other advantages to this type of business entity:

• Lower taxes: Unlike an LLC, which taxes the members based on the total net income of the business, shareholders of an S Corp are taxed solely on their wages. However, it is important to be aware of the requirement that shareholders must be compensated reasonably; excessively low wages are a red flag for the IRS.

• Business expenses: Shareholders can claim certain business expense deductions on their tax returns. However benefits such as health insurance are considered taxable income if the shareholder has 2 percent or more shares.

• Business protection: Because an S Corporation is an entity separate from its shareholders, the business can continue to operate smoothly even if shares are sold. This independence also protects shareholders from liability claims related to the business.

In order to become an S Corporation, you must first create a C Corporation. The IRS places restrictions on when a company can change its designation to an S Corporation, so it's important to work with a qualified professional who can help you maintain compliance.

If you need help forming a new business entity or changing your existing designation, contact the professionals at The Tax Office, Inc. We'll help you determine which designation makes the most sense for your company. We also provide corporate tax services, bookkeeping and dissolution's.