Before starting a business, it is important to understand the difference between S Corps and C Corps. Both offer limited liability protection and tax benefits, but they’re not exactly the same.
S corporations are pass-through entities; this means that their profits and losses flow through to the owners’ personal income tax returns. Therefore, S Corp owners do not pay any taxes at the corporate level; they only pay taxes at their individual level. However, C Corp owners do pay taxes at both levels — at the corporate level as well as on their personal return. This is why C Corp owners often pay more than double what S Corp owners do in federal income taxes each year.
Let’s take a deeper look into the two, and why hiring an accountant is in your best interest.
S Corporations are corporations with stock and shareholders, operated for the benefit of their shareholders. An S corporation must have at least one shareholder, and can only have one class of stock. The main advantage to an S Corporation is that it offers limited liability protection to its owners. If a C Corporation incurs debt, the owners are liable for that debt up to the value of their investment in the company. In an S Corporation, however, owners are exempt from this type of responsibility.
How are S Corps Taxed
An S Corp is taxed like a partnership because its earnings pass through to its owners for individual tax treatment instead of being taxed at the corporate level. This means that you can deduct your losses as an owner against your other sources of taxable income. Even if they’re passive (i.e., they’re not salary or wages).
C Corporations are corporations with stock and shareholders, but they do not operate for the benefit of their shareholders. An C Corporation must have at least two shareholders and can only have one class of stock. The main advantage to a C Corporation is that it offers more tax benefits than an S Corporation does. For example, there is no limit on how much salary you can pay yourself as president or director. The amount you pay yourself is taxed as personal income rather than self-employment income which would be subject to self-employment taxes. Also, C Corporations can deduct full amounts for depreciable assets like vehicles or equipment used.
Do C corps get double taxed?
Yes, C corps do get double taxed.
When it comes to double taxation, there are two kinds: push and pull. Push means that money is taxed at the business level and then again when it’s paid out as dividends or salary to shareholders or employees (push). Pull means that money is taxed as it flows through a business entity and then again when it’s paid out as dividends or salary to shareholders or employees (pull).
Why do C corps get taxed twice?
Whenever a company makes a profit, it pays taxes on that profit. The idea is that companies have already been taxed at the corporate level for their funds. But now the money belongs to shareholders, who should be taxed on the money they receive from their companies. This makes sense, but there’s a problem when companies distribute dividends to shareholders—they’re taxed again. It’s called double taxation because the profits are taxed first at the corporate level and again by the recipient of dividends at the individual level.
How & Where to Start Your Business
Setting up either type of business requires filing paperwork with your state’s secretary’s office. You’ll also need to register with the IRS if you plan on taking in any income from your business.
This means hiring an accountant and making sure you’re familiar with the tax laws for each entity. Each has different tax implications, which can make it difficult for small businesses to choose which one is right for them.
Working with an accountant like Wasatch CPA Services and having a thorough tax plan can help you make the right choice for your business type.
Hire an Accountant in Spanish Fork, UT.
When you hire an accountant, you need someone who is willing to work with you and your business. You want to work with an accountant who will listen to your needs and help you solve problems. A good accountant will also help you grow your business by offering advice that helps you reach your goals.
The expert accounting team at Wasatch CPA Services LLC is here to help you with your office, business, and individual accounting needs. Feel free to contact us to see if we’re a good fit for you and your business.
You can reach us at (801) 609-3119, or, you can easily book an appointment with one of our specialists, here.