Once an individual makes the decision to start a business,  usually the next decision that has to be made is determing the type of business they will have.  There are many options available,   This is a common question among new start-ups, as well as those already operating their business, and unfortunately there is no “one-size fits all” answer to it. This is why we always seek to gain an in-depth knowledge of your business and personal objectives for starting and operating your business in order to provide the most appropriate answer for your unique situation.

In addition to understanding your situation, facts about how each business structure is taxed helps our clients understand which business structure may be more desirable than others. Most do not realize the major tax differences that can exist between operating as a C-Corporation versus an S-Corporation. Below are some basic taxation facts about each that you should keep in mind when deciding on a business structure that best fits your needs (from a tax perspective, of course):

C-Corporation

• This type of entity has a double tax that deters most business owners from choosing this type of structure. This means the corporation itself will pay federal and state income tax on its profit and the shareholder will also pay income tax on any dividends (profit) issued by the corporation. Operating as an S-Corporation can alleviate the double taxation issue.

• C corporations often run the risk of having shareholder salaries characterized as “unreasonable compensation” and disallowed. As a consequence of this re-characterization, the payment is taxed as a dividend. Furthermore, your previous deduction for compensation expense would be taken away.

• C Corporations may have more than one class of stock, allowing for preferential payouts for certain types of stockholders. This is not allowed under the S-Corporation, which does not allow such preferential treatment. However, voting and non-voting stock classifications are allowed.

S-Corporation

• This structure allows any profits and/or losses to “flow through” to the shareholder’s tax return, where federal and state income tax is ultimately paid on this income or losses are deducted against other income reported on the return. This essentially alleviates the double taxation found in C-Corporations. However, it is important to understand that shareholders are taxed on the profits of the company for any given year whether or not any distributions are made. Therefore, it is important to work with us to calculate any estimated tax payments that may be due prior to year-end.

• The IRS requires S-Corporations to pay their shareholder-employees a reasonable compensation. This means that the business owner must pay themselves via payroll and pay the related payroll taxes due on this pay throughout the year. Many owners, attempt to take cash distributions only without paying themselves any compensation at all. Doing this, puts them at risk of an IRS reclassification of such distributions later on, which could mean hefty penalties and interest on any payroll taxes that would have been due. We provide various scenarios for our clients to determine the best strategy for meeting this requirement without paying large amounts in payroll taxes.

If you are new start-up business we can help you determine which business structure is right for you. Owners already in business may need to consider whether their existing business structure is still the best for where you are now.