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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?

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Kathryn Morgan
The difference between an S Corp and a C Corp is all to do with taxes and liability. I can't advise on liability because that varies from state to state, but it is something you definately need to tAke into consideration. If someone gets injured at your business do you want to possibly lose your home? This is a serious consideration you need to talk to the attorney about.
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!
Leave a Comment 166 weeks ago

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Hugo Van Zyl
Good day, my client has USA LLC (Delaware), her tax residence is in California but she spends more than 200 days per tax year in SA. We want her to enjoy the USA unilateral tax benefit on foreign earned income as she wish to continue contributing to her USA retirement funds. Will there be a benefit in electing S Corp tax status? Main question is will C Corp foreign earned income as defined be tax free as if salary paid by S Corp? Second question: Will USA / South Africa treaty treat C Corp income as dependent or independent income?
Reply 156 weeks ago
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Chuck Heyde, CPA, CGMA
Unless you planning on making upwards of half a million dollars in taxable income per year, or have several partners, there is NO reason to set up an S or C corp. You can report all your income and expenses on your individual income tax return on Schedule C and save on legal fees.

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
Leave a Comment 159 weeks ago

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Blake Christian
It really will hinge on the type of business you will be operating, projected taxable income, and the debt/ equity and equity owner structure. LLCs will generally give you the most flexibility and long-term tax efficiency - particularly if you will have other owners. Otherwise an S Corp is generally best if you do not plan on having any other owners. Upon death or sale, an LLC allows for step-up of the underlying assets, which can be a significant advantage. LLCs and S Corps also give the owners a step-up in their "outside" basis for any retained earnings - while a C Corp does not. With all that said, C Corps still have a place in tax planning, so if you can avoid being classified as a personal service corp, the low graduated rates on the first $100,000 can offer some significant advantages, but planning around two-levels of tax - entity-level and shareholder level will require annual and long-term planning. You will also need to evaluate the state-level impact of
Leave a Comment 159 weeks ago

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