In some situations, an “S” corporation election may be right for you
If limited liability is your only concern, you may achieve limited liability status through a choice to incorporate your business as a “C” corporation or through the limited liability protection offered by an LLC or LLP in your state. You may take money or income from your “S” corporation through a salary if you treat yourself as an employee. But you may also take money out of your “S” corporation through corporate reimbursements for employee business expenses, through distributions, and through the rental of assets, you rent to your company, such as space in your home or other things the company needs for its normal operations. A Saafenet small business consultant can help you.
CPAs, tax accountants and tax attorneys may have the answers
Your “S” corporation, however, offers a pass-through effect on its net profit or losses which will appear on an annual K-1 schedule and must be added to or subtracted from the other income reported on your federal tax return for the year. You receive no revenue from a “C” corporation other than your salary unless it declares a dividend. A “C” corporation has its own tax liability. Thus, you do not get the benefit of taking its losses as a deduction on your personal tax return. Consequently, deciding to operate under a C corporate form of business at start-up may be too much.
While it is arguable, the ordinary income you receive from your “S” corporation will be taxed at ordinary income rates at the rates at which you pay your personal taxes. Both CPAs and tax attorneys will argue the merit or lack thereof of that issue. In our opinion, it’s a good thing when your salary doesn’t exceed the withholding amounts for Social Security taxes. The income that flows through to you from your “S” corporation is not subject to self-employment taxes. If you received that compensation as an employee, it would already be taxed. When you’ve not exceeded the statutory limits that require you pay Social Security tax, you’ll incur savings. If however, your salary exceeds the statutory limits the benefit related to avoiding federal self-employment taxes is lost.