Posted on

Al's column: Pros and cons of ‘S’ and ‘C’ corporations

May 22/29, 2017: Volume 31, Issue 25

By Roman Basi

 

(Second of two parts)

Screen Shot 2016-07-15 at 3.49.34 PMIn part one of this segment, I talked about the pros and cons of structuring your business as a limited liability company (LLC). In this section, I will discuss the differences between “S” and “C” corporations.

With an S corporation, profit is not subject to self-employment taxes. The self-employment tax is 15.3% for those who are self employed and encompasses both Medicare and social security taxes. Normally, when a person is employed by a company, the employer pays half of the tax subjecting the employee to only paying half of the full tax. When one is self employed, he or she must pay the full tax on their own. Under the use of a Subchapter S corporation, salary (not profit) is subject to self-employment tax. However, if the salary is insufficient, the IRS can reclassify the profits as a salary subjecting them to self-employment taxes.

This differs from LLCs, whereby both salary and profits are subject to self-employment taxes. For people with incomes below the social security threshold amount, this can result in a significant amount of money being put into self-employment taxes. This can be good or bad depending on one’s retirement planning needs and expectations.

Since S corporations are flow-through entities, losses can be deducted. This is also true for the LLC. However, this is in contrast to C corporations in which shareholders cannot deduct losses. Note: If an S corporation is experiencing losses, it can deduct them, and the owner will recognize the loss on his income statement, leading to a lower tax liability. However, there is a limit. You cannot deduct amounts that exceed your investment and loans to the company.

Screen Shot 2017-05-15 at 9.35.04 AMDuring operation of an S corporation, profits are taxed only at the shareholder level as opposed to C corporations, which are taxed twice. Just like with the LLC, the profits—not the distributions—are taxed.

When winding up the affairs of the entity and dissolving the business, profits are taxed once. This differs from C corporations, which can be hit very hard with taxes upon dissolution of the corporation.

Subchapter C corporation. Even though C corporations are taxed once at the corporate level and then at the shareholder level, certain tax advantages can come into play due to new tax legislation. Profits from a C corporation to a shareholder are known as dividends, not distributions. Dividends from C corporations enjoy a special tax rate at 15% to 23.8%. This means that money received from a C corporation, no matter if it is $1 or $1 million, every dollar is taxed at a maximum of 23.8% and is not subject to ordinary income tax rates, which can run as high as 43.4%.

At the corporate level, C corporations enjoy lower tax rates than most people do at many income levels. If your income is low enough, you may be able to use this to your tax advantage. If the corporations’ income is below $75,000, it can be to the advantage of the corporate holder to use a C corporation.

Another advantage of running a business as a C corporation is there are no ownership restrictions. Nearly any person in the entire world—United States citizen or not—can own the stock, and there is no restriction on the number of shareholders. Generally speaking, having a C corporation allows the businessperson to accumulate a large amount of profits, reinvest them, etc., and not have to pay taxes at a personal level.

When deciding which entity type to go with, remember to carefully consider the various tax and legal ramifications.

 

Posted on

Al's Column: Choosing the right business entity profile

May 8/15, 2017: Volume 31, Issue 24

By Roman Basi

 

(First of two parts)

Screen Shot 2017-05-15 at 9.35.04 AMIn the past, choosing a business entity under which to operate was easy. Either businesses operated as a sole proprietorship, a partnership or they incorporated as an “S” corporation or a “C” corporation. There were clear advantages and disadvantages to each one. The sole proprietorship and partnership had the advantage of simplicity and lack of formal arrangements. The C corporation was for national companies, and the S corporation was for those individuals needing asset protection and a formal entity in which to operate.

Today the business structure is not a default arrangement. Businesspeople have an alphabet soup of business types from which to choose. Though many of the new forms offer limited liability and single layer taxation, the tax and legal differences are not nearly as clear as they used to be. This series will discuss three types of business entities and point out some subtle and not widely known differences between the chosen entities.

All three entities are excellent for any small businessperson to operate a company. When deciding which entity to operate under, the owner must take into consideration legal liability, tax circumstances while operating and dissolution, the person’s goals and the size of the operation among other factors. Tax circumstances are of utmost importance when choosing an entity. However, ease of transferability, legal protection and other factors are affected under each entity type.

Limited liability Co. With an LLC, there are no restrictions on ownership. An S corporation, on the other hand, has restrictions. To hold an S corporation status, one must be a resident and citizen of this country. Also, no more than 100 people are allowed to own stock. If the requirements are violated, the company losses its S corporation status and it can’t attain that status for years.

Screen Shot 2016-07-15 at 3.49.34 PMWith an LLC, these restrictions do not exist and its status is not jeopardized. While most LLCs will maintain membership of well under 100 members, the option or ability to expand the number of investors rapidly does exist. Many immigrants just starting business can benefit from this classification as well without suffering from double taxation.

While there are formalities with the LLC, failure to follow usual formalities is not grounds for imposing personal liability. This is a major convenience and aids in limiting liability. The other types of businesses identified here are all subject to being disregarded as an entity if the owner does not obey formalities. This is what is known as “veil piercing,” which happens when company owners don’t observe formalities in paperwork, meetings and otherwise use the business as an “alter ego.”

While the owner of the business cannot use the company to defraud people out of money, the LLC liability protection does not require the formality by which corporations must abide. Hence the LLC can be a better insulator against liability if maintenance of meetings and documents is going to be an issue.

Shares of an LLC are easier to put into a trust than an S corporation. To put shares of an S corporation into a trust, special trusts must be used. It can be somewhat complicated and LLCs tend to work very well instead of S corporations if you want to transfer ownership through a trust.

With an LLC, no unemployment taxes are due on income—unlike both the C corporation and S corporation. While this is not a huge tax savings it is significant. If your business is going to make less than $10,000 per year, LLCs might be the way to go. If you’re an at home business, this is particularly important.

Part two will cover the pros and cons of the other entities.

 

Roman Basi is an attorney and CPA with Basi, Basi & Associates at the Center for Financial, Legal & Tax Planning. He writes frequently on issues facing small business owners.

 

 

 

 

 

Posted on

Laticrete forms partnership with Supercap

Bethany, Conn.—Laticrete has partnered with Supercap to form Laticrete Supercap, LLC. Supercap System licensed applicators use patented pump trucks to blend and deliver problem-solving underlayment systems to the jobsite. Pumping is done from the ground level and material is delivered quickly and efficiently, directly from the hose to the floor on large-scale surface preparation and remediation projects. Heights of 50 stories, even in congested urban areas, can be easily served. Deliveries and technical support will be available throughout North America. Continue reading Laticrete forms partnership with Supercap