Benefits of a C Corporation Versus an S Corporation)
While you might think based on the preceding pages of this "C corporation versus S corporation" discussion that an S corporation automatically and always beats a C corporation, choosing the better corporate tax treatment is trickier than that.
Experienced business owners and entrepreneurs may choose the C corporation tax treatment for the following reasons.
Growing through reinvested corporate earnings:
As the preceding discussion of C corporation tax treatment indicates, the dividend tax paid by the owners of the corporation is only levied at the point that dividends are actually paid out to the shareholders.
If a corporate plans to retain earnings to fund growth, a C corporation may not cost that much more in taxes on a current basis than an S corporation does. And do note that if a corporation earns and reinvests modest amounts of profit in the business, the tax rates may be lower than what I used in the example above. The first $50,000 in profit that a C corporation earns may be subject to a low 15% federal corporate income tax.
Tax-free fringe benefits for shareholder-employees:
Small corporations often employ their owners--which raises an interesting tax planning opportunity. A C corporation can provide tax-free fringe benefits to employees, including shareholder-employees.
In other words, the corporation can make pension fund contributions or buy health insurance for employees. These expenditures are tax deductions for the corporation. But the benefits aren't taxed to employees.
For many of these fringe benefits, by the way, the corporation needs to be non-discriminatory in the way it treats employees. With a pension plan, for example, the corporation needs to treat shareholder-employees and non-owner employees consistently.
With some fringe benefits, however--such as accident and health insurance--the C corporation may be able to discriminate, thereby providing shareholder-employees with generous tax-free income in the form of fringe benefits.
Failure to qualify for Subchapter S Corporation status:
Even if a corporation would benefit from being treated as an S corporation, the corporation may not be able to use S corporation tax-accounting rules.
Subchapter S corporation status was designed by the U.S. Congress for small, simple corporations. In order to be eligible to make an S corporation election, a corporation needs to have a small number of shareholders (generally less than 100 shareholders) who are all either U.S. citizens or permanent residents. Further more, the s corporation must have only a single class of stock.
Additional Small Business Corporation Tax Resources
I've tried to supply lots of good, free general small business tax planning advice at this website. But I also sell three downloadable e-books (see below) that provide more specialized and powerful small business tax planning advice and commentary. If you're just starting out and cash flow is tight, you probably don't need (yet) the sort of information covered in these resources. But if your business is already profitable or about to become profitable, these guides truly should save you big amounts of business tax. But enough pushy selling...
You want to know the easiest, quickest way to cut your taxes? Find more business deductions. You should typically save thousands in taxes this way.Read More
Using an S corporation for business? The tactic in this case is to set as low a salary as is reasonable. But you must be both cautious and clever.Read More
Real estate is a great place to store the wealth a small business creates. But you can do more than that and use real estate to save massive amounts of tax.Read More