Before selecting to be taxed as an S corporation, you must evaluate your business and decide whether S-corporation is the right way to go, for your business. Consider the fact that changing an S corporation to a C corporation is a much longer process than converting a C to an S corporation. Therefore, you must be sure that it is beneficial to your business before making such a decision.
Most owners opt for an S corporation to avoid double taxation. But Consider the following facts before making your decision:
- Lower tax brackets: Maximum tax rate for a corporation is currently 35% as compared to maximum individual tax rate of 39.6%. If owners of the S corporation fall under the highest tax bracket, C Corporation might have lower tax outcome.
- Distributions to owners: Distributions to S Corporation owners are taxed at their individual tax rate, whereas distribution to C corporation shareholders are maximum rate of 15%.
- Employee compensation: C corporation shareholders can pay themselves as employees for services rendered, which is deductible expense for the C corporation resulting in lower taxes.
We can help evaluate your business and recommend the correct entity type that best suits your business needs.