Tips
"C" & "S" Corporations Compared
- Lower tax rate on profits of the corporation
Profits of a "C" corporation are taxed at a relatively low rate. The corporation is taxed at 15% on amounts up to $50,000, rates increase above that amount. "S" corporations have their profits "flow" through to the shareholders at the end of the year. Profits are then taxed atthe higher personal rates. However, retained profits in a "C" corporation can be "double-taxed" when distributed to shareholders. "S" corporate profits are only taxed once. - "C" corporations that are personal service corporations (i.e., physicians, engineers, lawyers) must pay tax on 35% of the net income. "S" corporations, because of the "flow-through" do not have this problem.
- Not limited on the number of Shareholders
"C" corporations are not limited to a maximum number of shareholders as opposed to "S" corporations where no more than 75 individuals can own shares. - Not limited on the type of Shareholders
"C" corporation owners can be individuals, trusts, non-resident aliens, corporations, partnerships or LLC's. Owners of "S" corporation shares can only be individuals, estates or certain types of trusts. - Ability to choose a fiscal tax year
"C" corporations have flexibility in electing a fiscal tax year that best matches the company's business cycle. "S" corporations have a number of restrictions in choosing a year-end other than December 31. "C" corporations can also use a delayed tax year to defer taxes. "S" corporations are required to make payments reflecting any tax deferral. - Deductible Expenses
Expenses like charitable contributions can be deducted in a "C" corporation subject to certain income limitations. "S" corporations would pass charitable expenses through to the owners. - Use of Net Operating Losses
Federal losses of "C" corporations can be carried back or forward to other year's tax returns. This can generate tax refunds or offsets to future taxable income. "S" corporation losses can be deducted on the shareholder's tax return, if they have a "tax basis."
This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, consult with your professional advisor.
