Advantages of Corporations

The following apply to LLCs as well.

A corporation is a separate legal entity from the
its owners / stockholders.

• A corporation can own property

• A corporation can enter into contracts

• A corporation is responsible for its own debts

• A corporation's shareholders, directors, and officers are not liable for corporate obligations
  
   

The Best Entity For Most Businesses is Probably a C Corporation

With  a "C" corporation, you cannot deduct losses from personal losses, or other ventures you get into, but with a "S" you can. However, you can deduct many losses on your personal income tax, so I would not worry much about it.

On the other hand, with a "C" you can enjoy tax free fringe benefits such as health insurance and travel. In addition, remember, with an "S" you are self employed, whereas, with a "C" you are an employee and owner of a corporation. This weighs much more with banks and other types of creditors and clients.

Anyway, if you try to build a corporate name and credit, and enjoy fringe benefits, a "C" is better. On the other hand, if you want to offset losses from other ventures, an "S" is better.

We have a progressive income tax system and it is very expensive to have too much income. 

For example, for individuals, the tax brackets are 15%, 27%, 30%, 35% and 38.6%. 

A “C” corporation’s tax rate is ranging from 15% on the first $50,000 of net income, to 39%. 

With an S corp, all of the corporation's income is counted as your own personal income pushing you in the higher brackets.  With an S corp, the shareholders are required to pay income whether or not they take any money out of the corporation.

However, owners of C  corporations can split their purchases of business assets among  several of their different businesses -- as opposed to owners of  S corporations under Section 179 deduction, which is limited to just one amount. 

In addition, a C corporation using the deduction for net rental losses is increased because a C corporation can use rental losses to offset all operating income.   However, S corporation are subject to more restrictive rules.  

Shifting income between taxable years

Here is how you save money with this method.

Individuals report their taxable income based on a calendar year: the January 1 to December 31 calendar year.  S corporations are not allowed to shift income between years. 

On the other hand, C corporations can end their fiscal year at the end of any month.  Just remember that the first tax return can be less than a full 12 months, so there is no concern with making it a full year starting from the incorporation date. 

Do this to save on taxes.  Just about the year end, pay your C Corporation with some of your personal tax income.  Us something like paying for leasing something from the corporation or advertising for you.   The corporation can pay you back in the next month of the next year ( e.g., January.  When it gets close to the end of the corporation's fiscal year, pay yourself  with some of the C corporations net income.  You can shift income in that fashion indefinitely. Just make sure that you pay the lowest tax possible (15%).

Employee Benefits  Tax deductible Fringe benefits

Employer-paid medical insurance & expenses. Employee compensation, in the form of employer payments for health insurance premiums and other medical expenses, is deducted as a business expense by employers, but isn't included in employees' gross income.

Other employer-provided insurance benefits. Many employers cover part or all the cost of premiums or payments for: (a) employees' life insurance benefits; (b) accident and disability benefits; (c) death benefits; and (d) supplementary unemployment benefits. The amounts are deductible by the employers and are excluded as well from employees' gross incomes for tax purposes.

Exclusion of employee parking expenses and employer-provided transit passes. Employee parking expenses paid for by employers are excluded from the employees' income, up to $155 a month, indexed for inflation. (Parking at facilities owned by the employer isn't counted as a tax break.)

Other fringe benefits. Several other employee benefits are not counted in employees' income, although the employers' costs for these benefits are deductible business expenses. Such exclusions include, among other things, child care, meals and lodging, ministers' housing allowances and the rental value of parsonages.

You want to go further?  Form another corporation, transfer your cars to it, and then lease them to your Inc. 

Your "leasing corporation" makes some money, you drive for free and you deduct all depreciation and expenses.

How to avoid Double Taxation

The most serious concern of c-corporations is double taxation but this only happens when earnings are distributed to shareholders as dividends.

You can remedy this problem with deductible withdrawals of net profits.  For example you can withdraw compensation for yourself as wages or consulting income, interest payments, lease payments, royalty payments, and sums paid to retirement accounts

If you have a problem S Corporation, here is how to fix it

First, know that you can change from an S to a C corporation but afterwards  you cannot change back to an S for 5 years.  In addition, if you change from a C to an S, you cannot use a C corporation fiscal year and   You will have to use the December 31 fiscal year.  It is probably better to just Register a completely new corporation but it can be expensive.  

Note that all corporations are C corporations when Registered and you need to have all shareholders sign and submit Form 2553 with the IRS to request the S status. You can do that right away or wait a few years – but note that if you have been using a fiscal year that does not end in December, you will have to change to a calendar year ending in December.  

Also note that if your S election for some reason is revoked, you will probably not be allowed to use a fiscal year that does not end in December.   In addition, note that some states have effective dates of the S election. Some States accept the IRS's S election regardless of the time you elect it but others require that you fill a state form to request S Status.