I am in the process of setting up a new corporation and am being advised to set up an S Corporation by my CPA and a C Corporation by my Lawyer. What is the right way and what are the reasons of one over the other?
Tax Professional Answers
From the tax standpoint it works like this. In an S Sorp the income and expenses are all tallied on the form 1120S an then everything is sent as a "pass through" on the K1 to your personal return and taxed there. If you are an active member of the S Corp you are required to take "reasonable compensation" and be paying into FICA. The S Corp itself pays no taxes, everything flows through to the shareholders personal returns.
For a C Corp, this is a completely separate entity from the personal returns. The C Corp return is completed and the company pays taxes at a rate of 35%. Any income taken out of the company by the shareholders must be paid as either dividends or a lowering of your investment in te company and is then taxable on your personal return. If you are an active member of the company you will be paidon a W2 just like any employee.
There is no flat right or wrong answer to this question. It will depend on your specific situation and where you live. Get your CPA and Attorney together and see why each is advising what they are advising. Then do a list of pros and cons for each. Good luck! Good Business!
Be leary of the CPA or Attorney that advises you to set up an S or C and does not advise you of the tax benefits.
Chuck Heyde, CPA, CGMA
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