You will obviously want to choose the structure which will allow you to take advantage of the most tax benefits and corporate tax breaks possible, often determined by how much your business or personal income from that business is.
Let's take a look at the different corporate tax breaks that can be applied within the different corporate structures.
The thing to note with a C-corp is that you will in fact be paying two different taxes. You will have to pay the corporate tax at the federal rate (the more your business makes the higher), and you will also have to pay income tax on any money that you withdraw from the company.
In effect, you are being taxed twice.
One advantage of a C-corporation is that you may elect to pay half of the self employment tax yourself, while the other half is paid by the corporation.
People often stop right there when it comes to the relative tax benefits of a C-corporation, but in fact there are a few more that are worth mentioning.
The expensing election tax deduction works in favor of all corporate structures, but in fact may benefit C-corps more than other forms. Deductions can be multiplied under this law by splitting the purchase of business assets between different business entities.
Finally, C-corporations are allowed to end their fiscal year at the end of any month.
That way, individuals can create their own tax deductions by bleeding off income to the corporation and then pay it back at the beginning of the new year.
S-corporations, on the other hand, will be exempted from double taxation most of the time. S-corps do not have to pay the corporate tax, instead just being taxed on the personal income generated by the company.
However, it is important to note that there are some states in which S-corporations must pay corporate tax and still pay the personal tax.
In addition, individuals may not split the tax payments between themselves and the company.
Limited Liability Companies are mostly beneficial to the owner in the separation they offer in the event of a lawsuit.
This separation occurs between company and private assets. As far as corporate tax breaks and cuts go, LLCs will have be charged at corporate tax levels, but usually at much lower brackets than C-corporations - so they can be the right choice for your small business as far as taxes are concerned.
It is very important not to underestimate the abilities of professionals when it comes to deciding your corporate structure and tax benefits.
Taxes are just not something that most small business owners can begin to grasp on their own simply by reading some information. Relying on your own understanding of tax laws can mean that you miss important corporate tax breaks, or worse - pay much more than you needed to.
Before you decide on a business structure, sit down with a consultant or competent tax professional and determine which is best for you in terms of corporate taxes.