Should I form a partnership, C corporation or S corporation ? Tax purpose?
Posted on June 1, 2009 by admin
CARGUI99 asked:
Should I form a partnership, C corporation or S corporation ? Tax purpose, Tax advantages
Should I form a partnership, C corporation or S corporation ? Tax purpose, Tax advantages
Not enough info. This can be exceptionally complicated. Things that make a difference are ownership structure (you alone, several folks), the type of business, the type of benefits you as an owner employee may want, etc etc etc.
Setting up a Chapter S Corporation can be very beneficial to a small business. It is a hybrid business entity that combines some of the advantages of corporation with those of a partnership. Shareholders are not personally liable or responsible for losses beyond their original contribution, yet the business is taxed like a partnership because the profits and losses from an S Corporation are not distributed as dividends, but are passed directly to the shareholders, who have to pay personal tax on them. The profits are taxed only once, since dividends are not issued. Also, corporate profits accrue directly to owners and can be offset by other losses.(To form an S Corporation, you must be based in the U.S. and may only issue one class of stock, which may have no more than 35 shareholders.)
Way to many variables to give a satisfactory answer. It will depend heavily on your specific circumstances and you should consult a lawyer or accountant, or both for a final answer. In simple terms:
Partnerships are just regular sole proprietorships that are run by more than one person. Gains/losses, etc can be split in many different ways, but in the end the taxes are paid by the owners as individual income.
C Corps are completely autonomous entities. They make money, incur expenses, and pay taxes at a corporate rate after you net the two. Capital is the money that is provided by the owners (stock for major corps). Any return of capital is considered non taxable. Most payments that an owner receives, though, will be in the form of wages. This is an expense for the corporation but is taxable to the owner.
S corps are similar to C corps except that the earnings are considered to be earned by the individual. The corporation does not pay tax as all earnings flow through to the owner. As a general rule this form of business is the most advantageous.
If you are a sole proprietor or have less then 5 partners I would recommend a LLC. If your have alot of partners and plan to make over a million dollars a year I would recommend an S corp. A C corp is if you plan to offer stock. An S corp won’t help you if your starting out and useing your home for an office, as a single owner an LLC protects you for certain legal issues and you can use part of your home for a deduction.