Flow-through taxation: Profits are distributed to the shareholders, who are taxed on profits at their personal level.Distinct, court-recognized existence, which helps protect you from personal liability that can cause you to lose your personal wealth in assets like your home, car, or nest egg.An unlimited number of management, no state residency requirements. ![]() ![]() Limited liability for management and shareholders.And, it’s enough, in many cases, to make the difference between going “S” or going “C.” Again, you will work with your CPA, tax and/or legal advisors to determine the best entity for your specific situation. The tax rate for PSC earnings? 35%! That’s probably higher than you would pay through your S Corporation if you took a reasonable salary and the rest as passive income. So, to head off the anticipated revenue drain, the IRS closed the loophole by designating C Corporations that provide services as PSCs. And, that 15% rate is also lower than you would pay if your business was an S Corporation. That’s quite a bit lower than you would pay personally if you were receiving that same $50,000 as salary. Now, as you may know, the IRS assesses C Corporations with a pretty low initial rate - 15% on earnings up to $50,000. PSCs are C Corporations that are classified by the IRS as providing a service, such as consulting, to the general public. S Corporations can help some service-oriented businesses to avoid being characterized as a Personal Service Corporation, or “PSC” by the IRS. If the restrictions aren’t followed, the IRS will decide the corporation is C Corp and will double tax it accordingly. Corporations, multi-member LLCs, and non-US residents cannot be S Corporation owners. There can only be 100 or fewer shareholders (owners), which all must be individuals or their living trusts. Of all of the entities, the S Corporation has the tightest restrictions on ownership. This type of taxation, the S election, allows the shareholders to be taxed only at the individual level only instead of at both the corporate and individual level, thus avoiding the double taxation like the C Corporation. The “S” also refers to an IRS code section. There are pros and cons to every entity type and it’s important to understand which business model is best for you.Īn S Corporation is a corporation that has elected to be taxed as a flow-through entity (similar to an LLC or Limited Partnership). Other choices include Limited Liability Companies (LLCs) and C Corporations.īusiness owners can select how they wish to be taxed, and an S Corporation is one of those tax designations that can make a big difference in how much you pay in taxes, and how to handle profits and distribute shares. An S Corporation is one of the three popular choices for those incorporating their business. ![]() It can make a difference in asset protection as well as in taxes. This is a great question to explore when starting a business, or changing your existing business from a Sole Proprietor or General Partnership. Is an S Corporation the right entity type for you?
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