Which saves you more taxes a C-Corp, S-Corp or LLC?
Okay, you should know by now that my answer will have to be ‘it depends’! I wouldn’t be a great CPA if it wasn’t.
This is a tricky question because there are many different angles to look at when searching for the pros and cons of choosing the right entity, let alone deciding which is better for taxes. So for this article, I’ll just address some planning issues that vary between the entities.
All-year tax planning, and especially year-end tax planning, is very important no matter which entity you have and the tax consequences for each are costly.
Let’s start with the basics on now each are taxed. A C-Corp is taxed as a separate entity, an S-Corp is a flow-through entity that isn’t taxed at all (the owners are personally taxed) and an LLC, interestingly enough, can be taxed as an S-Corp, a Partnership or a Sole Proprietor all of which are taxed at the owner’s level not as an entity.
So when it comes to tax planning here’s a few things to consider:
Because a C-Corp is an entity, the instinct is to take all the deductions, bonus out salary, and put the max into your retirement to get the income down as low as possible so the entity doesn’t get taxed as much. And that is a good strategy to a point. The tax brackets for corporate tax are lower than for individuals, so by letting some income be taxed in the corporation rather than on your personal return will actually save you money. It’s important to have clean books and good financial projection because these can’t wait until tax time – many have to be completed prior to the end of the year.
An S-Corp is a flow-through entity and therefore you can’t just plan based on the corporation alone. Your personal tax planning is critical to consider in making corporate decisions. This gets tricky with multiple owners but for the sole owner the most important thing to remember tis to avoid surprises. By planning in November, you can maximize your deductions, set up retirement plans, purchase assets, remove under-utilized assets, take dividends, repay shareholders and balance distributions between loans, salary and dividends to maximize the tax savings. With good order in your finances and advanced planning, you should know exactly how much cash you’ll need come tax time.
If you are a single member LLC (SMLLC) you can treat your LLC as a disregarded entity and not even file a federal tax return. That means that all of your income shows up on your Schedule C as a sole proprietor. That means all of your income is subject to self-employment tax (an extra 15% or so added to your regular tax). Tax planning for an LLC is different because as a SMLLC you don’t have wages or bonuses to adjust, and if you have multiple members in the LLC then planning for partner payments needs to be thought out in advance.
This is challenging stuff, I get it. You may have started your company without any understanding of these entities, but now that you’re starting to pay some money into taxes, you will feel the pain of not being organized and not planning ahead.
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