You’re ready to take the plunge and start a business, but it can be hard to tell what corporate structure is right for your new company. One of the most basic decisions is to choose between a C corporation or an S corporation. Both have their advantages, but they also have very different tax consequences.
What’s in a Name?
A C corporation is what is normally defined as a corporation. The S corporation, however, receives a special tax status. It is named after Subchapter S of the federal tax code. To select the special status, IRS Form 2553 must be filed no later than two months and 15 days after the first day of the taxable year.
Differences in Taxation
The advantage of an S corporation is that it’s considered a pass-through tax entity. The corporation itself pays no income tax. The owners report any profits or losses on their personal tax returns and pay any resulting taxes directly. C corporations not only pay taxes at the business level, but the owners can end up facing double taxation if they receive any income as dividends.
Selling Your Business
When it comes time to sell a C corporation, the owners end up taxed twice when its assets are sold. The company pay taxes on any profit from the sale, and the shareholders get hit with a capital gains tax once the business is dissolved. Owners of S corporations avoid double taxation on the sale of assets as the income or loss is passed-through to them to be reported on their personal tax returns.
Finding the right corporate structure doesn’t have to be confusing. The professionals at Numbers House have your back. We can advise you on the best corporate structure to meet your personal and business needs, and we’ll happily complete and file all the complicated paperwork to set up your business.
If you’re ready to learn more, call Numbers House at (865) 294-7300 or email us at firstname.lastname@example.org.