This is the time of year many of my business clients begin thinking (or doubting) how they’ve defined their businesses.
Should you be a “C” or an “S” corporation?
Should you evolve your LLC into a slightly different version of an LLC for tax or inheritance purposes?
We get a LOT of these questions, and there’s often no simple answer for them, so this month, I want to take some time to go over some of the options – and try to share some of the tax benefits and liabilities of all of them. Let’s start with the big ones – the C- and S-Corps and I’ll share some of the LLC information as the month goes along.
From a strict definition point of view, the S-Corp is “a type of corporation that meets specific Internal Revenue Code requirements. The requirements give a corporation with 100 shareholders or less the benefit of incorporation while being taxed as a partnership. The corporation may pass income directly to shareholders and avoid double taxation.”
By contrast, a C-Corp is “a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.”
Right away, you can see that the C-Corp has that scary term, “double taxation” – the truth is, the S-Corp is considered a “pass-through” entity, much like the LLCs that many small business owners are familiar with. Yes, a C-Corp will “tax” you twice, but the benefit is the ability to grow exponentially and protect your individual assets holds a great deal of appeal to many companies – especially those that expect to be 7, 8, or 9 figure businesses in the future.
The reality is, most business owners who are considering the shift to an S- or a C-Corp are likely better served with the S-Corp, but certain industries – like tech, some retail, or companies that are expecting to franchise quickly – might find the C-Corp designation better in the long run.
Another handy tool that a lot of tax professionals might share with you is this: if you aren’t doing over a million dollars a year in income, stick with an S-Corp.
…And while I would love to talk to you about making that move, I also want you to be aware of the various options that the LLC offers, too. As you’ll see in the coming emails this month, there are a lot of ways to define your LLC – and even set up the tax structures – that give you many of the benefits of the C- and S-Corporations without the hassle and expense.
Remember, it’s a process, and one that is based on growing a business, not merely building it and hoping it will be the right one.
