People have been using corporations for decades in order to limit the owner’s liability and allow them to take greater risks and to encourage investment. The very reason why people still continue to do this up to this date.
There are two types of corporations that you will frequently hear about, namely: the C Corporations and the S Corporations. The state of organization has granted these two kinds of corporations with charters. C Corporations are the most common and sought after type of corporation due to the advantages it has to offer. Your entity will surely will enjoy all the benefits.
The C and S are actually IRS Code Sections C Corporations experience double taxation meaning one tax for the company level and another on the profits that are distributed to the shareholders. This double tax is what drives most people away and consider s corporation that only feature one tax level. But S Corporations have restrictions on ownership unlike the C Corporations
Tax Advantage: Expenses and Deductions.
A C Corporation enjoys the widest range of expenses and deductions that are allowed by the IRS, most especially in the field of the employee fringe benefits. C Corporations are able to set up different employee benefits such as medical reimbursements and many others, and subtract the running costs of said programs including all the premiums that have been paid. The value of the benefits are not taxed so your employees as well as you the owner or shareholder won’t be worrying about that aswell.
However, these benefits are not enjoyed by flow-through entities such as the S Corporation. In the case of these kinds of entities, they may be able to deduct the costs of the said benefits, but if an employee or a shareholder owns over 2% of the company will have to pay taxes based on the value of the benefits being received. So if you wish to have employee benefits that are tax free as well as enjoy a maximum amount of deductions then a C Corporation is possibly the entity for you. Discover more facts about business at https://www.britannica.com/topic/business-law.
Tax Disadvantage: Double Taxation.
The blatant disadvantage that most people cite is the double taxation. Double taxation mainly occurs when a C Corporation has some profit left by the end of the year and plans to distribute the extra profit among the shareholders as dividend. The entity has already paid the taxes on the profit, but once the profit is to be distributed as dividend among the shareholders they will have to declare it as income, meaning they will be paying taxes again on their personal tax returns based on their personal rates.
Various companies such as Corporate Direct can help you decide what type of corporation works best for you.You can see more here if you wish to learn more about this topic and find out which corporation works best for you. Be sure to see more here!
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