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Written by : Violette Hypes
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hello everyone so today we're going to be quickly defining and comparing the differences between C corporations and S corporations so AC Corp is the most common type of business entity in the United States as it is a separate legal entity set up under state law that protects owner assets from creditors claims also known as limited liability AC Corp is a separate taxpayer with income and expenses tacked tax to the corporation and non owners if corporate profits are then distributed to owners as dividends owners must pay personal income tax on the distribution creating what's known as a double taxation so money is taxed at the corporate corporate level and then at the personal income tax level now a simple example consider a small business that has the following earnings and they're the same for years one through three they have a business tax rate of 30% and a federal income tax rate of 28 percent so they earn a million dollars their cost of goods sold is $150,000 their gross profit is their 450,000 they have another another $50,000 and operating expenses so they have ebin or income from operations of $100,000 now tax on this at 30% is 30,000 so their net income is 70 and the assumption is for this small business $50,000 is paid out as a dividend to the owner so you deduct 50,000 and 20,000 goes to retained earnings right so they get taxed at the corporate level 30 percent or $30,000 now on the personal income tax form so now we take those earnings assuming that this individual does not receive any other type of salary or income from other sources they receive $50,000 and so they paid 28% their personal tax rate on that $50,000 which is 14,000 so after-tax earnings from all this money that flowed through the entity for starting out when they first earned revenue - when it was paid out is $36,000 and so this is done for all three years okay now the advantages of C corpse are limited liability and limit growth potential and the ability to sell equity to raise money and that's that's why all really most public companies are I see corpse there's no shareholder limit so there's no limit on the amount of shares that can be sold to the number of people and you have the ability to enjoy tax deductible business expenses now the disadvantages of see corpse are the double taxation that's the big one and that's why I really made this video because it remains a challenge as many owners seeking to be paid through dividends from the business will pay extra it's also more expensive than an LLC or a partnership it there's increased regulations and formalities and that's a steep learning curve especially for small business owners and there's no deduction of corporate losses for personal tax returns because that's done at the corporate level so there's no flow-through right so that's why it's a separate taxpayer that's the big takeaway from see corpse now with s corpse once you've incorporated you can elect S Corp status by filing a form with the IRS and with your state and as it is more attractive for small business owners once applicable the profits losses and other tax items pass through the corporation to you and are reported on your personal tax return so the S corporation does not pay the corporate tax so this is considered a flow-through entity the S corp is not a separate taxpayer like the C Corp it is a flow-through entity the risk is that owners report their share of profit and loss in the company on their personal tax returns in addition there is a limit of 75 shareholders which can be a challenge if the company considers raising money through private placement so that's really the big downside to this that's why a lot of public companies are really all private companies our C corpse because there's a limit of 75 shareholders because if if there wasn't then everyone would be an S corp really because there's so much tax if it's related to really being a flow-through entity you know there of course would be logistical II complicated with thousands of shareholders to all reflect you know the flow-through status but again theoretically it would be a large benef so consider the same business so the business has a tax rate of 30 percent but they don't pay that 30 percent and the federal income tax rate on the personal income tax form of 28 percent is the same right so no tax is paid at the corporate level so we make the same amount of money a million dollars we pay cost of goods sold of 850 gross profit is 150,000 operating expenses of 50 thousand are deducted so our income from operations or EBIT is a hundred thousand dollars but that's not really all sort of net income because we don't pay right so that flows through all of that money goes to our personal tax form okay so then on our personal tax form we have earnings of a hundred thousand for this year and the assumption here is also that there are no tax brackets but I just wanted to simplify it right because with tax brackets probably your tax percentage tax rate would increase between the two examples but in this case assuming the same twenty percent tax rate taxes on this hundred thousand would be to twenty eight thousand right so after-tax earnings is seventy-two thousand dollars right so the advantages of the S Corpse are limited liability the same as C corpse the key benefit is passed through taxation thus eliminating the double taxation on distributions the ability to raise capital by selling shares so the same thing except there's a limit and a once a year tax filing requirement versus quarterly filing for C corpse so that logistically also saves time for you now the disadvantages are you must be a US citizen and a permanent resident unlike the C Corp or LLC you have a limited amount of shareholders or the maximum of a hundred at the national level in some states at seventy-five it depends on on this so I would recommend that you check out the laws and sometimes it change also closer I IRS scrutiny and high ongoing expenses and tax qualifications can be terminated terminated if mistakes are made and so because you're eligible for S Corp status there is much more scrutiny from the IRS so you need to be careful properly file your tax returns and if you do make mistakes you can get penalized by being taken away so that status is taken away and you convert back to us C Corp so the difference between the two both C and s Corpse offer limited liability protection both require Articles of Incorporation to be filed and both compromised shareholders directors and officers there are lots of similarities but they differ in the realm of Taxation and corporate ownership see Corpse are subject to double taxation who are s corpse are passed through tax entities in addition there is no limit to the number of shareholders for C corpse which is most public companies whereas there is a hundred shareholder limit for S corpse so comparing those two examples that we looked at so again the same business but in this case paid at the corporate tax there's a corporate tax and a personal attacks whereas with the S Corp there's only a personal attacks right so the after-tax earnings for the C Corp is 36,000 and t
Thanks for your comment Nick Widjaja, have a nice day.
- Violette Hypes, Staff Member
hey this is attorney elizabeth potts weinstein and today we're going to talk about the differences between llcs s corporations and c corporations and how to tell what's the right business entity for your business before we get into the differences between those three different type of entities it's important to understand that there's actually only two different type of entities that we're talking about llcs and corporations this is because there are two different considerations that we're going to be discussing one is the legal entity llcs or corporations and the other is how it will be taxed the tax status of your business so you can have an llc that is taxed as either a sole proprietorship or partnership depending if you it's one owner or multiple owners an llc that's taxed as an s corp or an llc that's taxed as a c corp and then you can have a corporation that's taxed as an s corp or c corp so you can see it's a lot of different combinations you can have and that's why we're going to split this up into talking about the legal entities llc's and corporations and the tax statuses whether or not you want to be just a pass-through tax entity like a sole proprietorship or partnership you want to be taxed as an s-corp or taxed as a c-corp when you're looking at llc's limited liability companies versus corporations the first thing you want to look at is the practical consideration how much is it going to cost to set that up in your state or the state in where you want to form it in some places the filing fees between an llc and a corporation are huge some places you have to do publishing of an llc and that's thousands of dollars in some places they pay different state franchise fee taxes there's a lot of differences that are purely logistical and you want to look at your state or the state where you want to form your business entity to see if we're talking about the same fees or thousands of dollars of different fees next you need to look at the owner and what is your status if you want to be taxed as an s-corporation the business owner has to either be a us citizen or have a green card there's also some other requirements too but a business that has an owner who's not a citizen doesn't have a green card can be an llc that's taxed as a partnership so you have to look at the owners to see what's even possible for you before you go ahead and form an entity and then need to switch later the third aspect is looking at your goals so for example do you want to raise money you want to bring in investors and you want those investors to be passive investors it may make sense to form a corporation that you can have a bsc corporation so you can have different classes of shares versus an s corporation you might want to form an llc with investors if the investor is someone you personally know you're just going to have one or two investors but if you're looking to pitch vc you probably want to go with a corporation i forgot one important distinction between llcs and corporations and that is llcs have more simple corporate formalities all entities have some formalities you have to observe such as keeping everything separate your finances separate your personal finances separate from the llc or the corporation's finances but corporations have more corporate formalities including having annual director and shareholder meetings with minutes and if you don't do that then you might have trouble maintaining the status of your corporation as a separate entity a fourth aspect is just your familiarity and comfort level for these types of entities i have some clients where they create corporations because they've had corporations before they know how to do all the paperwork they're very familiar with it and so you want to look at the practical aspect of you and you're the one who has to maintain this llc or corporation over the years what are you going to be comfortable doing and the fifth aspect to think about is the type of business you have some businesses can only be llc's and not corporations or the other way around for example as an attorney in california i had to form a corporation because attorneys are not allowed to be llc's and that's true of professionals in many states many states don't allow them to perform llc's but some do the other aspect is certain kinds of businesses are traditionally formed as llc's or even llps liability partnerships which i'll talk about some other time because it just makes more sense for the kind of business they have they can structure it in a much easier way for example real estate investing businesses tend to be llc's or llps instead of corporations the next aspect is to look at the tax status so you formed an llc or a corporation how would you want it to be taxed if you have a llc and you want it to just have the default tax status that means it's going to be taxed as a sole proprietorship if you're only one person or a partnership if there's multiple people who own it the great part about that it's the default you don't really have to do anything it's relatively straightforward you can take the any losses from that business and apply it against your other income in some situations if you're an active participant in that business and that can be really helpful in the early years of a business if it's having losses at the end of the year but one of the problems of that is if you have profits in at the end of the year and you don't distribute it to the owners you still owe taxes on it and that can be very very frustrating one of the ways to solve that is to do a minimal distribution just to pay taxes but that's something you'll have to calculate at the end of the year another great aspect is the taxes are comparatively simple if you're taxed as a sole proprietorship if you're one owner because it can just be on your schedule c of your 1040 form and that can be something you do yourself or you use commonly available software if your business is an llc or corporation it can be taxed as an s corporation there are limitations on what kinds of businesses can be taxed as an s corporation based upon the status of their owners and i talked a little bit about that before but if you are able to claim s-corporation status this can be a great way to pay less taxes on the profits of your business so for example my business my law firm is organized as a corporation that's taxed as an s corp when i pay myself i can pay myself in two different ways one way is a salary and i pay myself a salary every week just like when i pay my other employees and when you pay yourself a salary as a paycheck you're going to have you know ficas and security all that stuff come taking out of it but i can also do distributions of the profit distributions of the profit is taxed differently specifically you don't have to pay self-employment income taxes on it so can reduce your tax burden but you can't pay just the profits to yourself as a distribution and not pay yourself a salary the irs knows that you want to do that and so you have to pay yourself a legit salary if you're working in the business another aspect of having an llc or corporation taxed as a
Thanks Arnita your participation is very much appreciated
- Violette Hypes
About the author
I've studied applied anthropology at George Fox University in Newberg and I am an expert in climate change policy. I usually feel grateful. My previous job was ship engineers I held this position for 30 years, I love talking about wax sealing and korfball. Huge fan of Bella Hadid I practice modern pentathlon and collect radio premiums.
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