C corporations are not pass through entities like S corporationsor LLC's. C corporations are subject to the double taxation concepton corporate earnings. This is where corporate earnings are taxedat both the entity level and a second time when the earnings aredistributed to shareholders in the form of dividends. Let's discussthis double taxation for a moment and put some numbers to it. Let'ssay that a C corporation has $1,000,000 in taxable income. Underthe new tax law it will pay a tax at the rate of 21% or $210,000.Let's then say that the C corporation then distributes theremaining $790,000 to its shareholders in the form of dividends.The shareholders will pay a second tax at the rate of 20% or$158,000. Thus, the IRS has received $368,000 in tax on the$1,000,000 of income or a combined tax rate of 36.8%. If thecorporation was an LLC or was eligible and made an S corporationelection, the tax rate would be 20% or $200,000. The tax savings is$168,000 by making the S election or being an LLC. S corporationsare pass through entities. So are partnerships, limited liabilitycompanies, limited partnerships, and limited liabilitypartnerships. It is usually, but not always, advantageous for astartup business to be a pass through entity. While the income froma pass through entity is taxed to its owners, any losses from thebusiness also pass through. Losses are very common in the earlyyears of a startup. The owners want to deduct these losses againstany other income they may have. In my experience, this ability todeduct the losses is just as important as avoiding double taxation.In sum, it is not so much about the income as it is about thelosses. What do you think?
C corporations are not pass through entities like S corporationsor LLC's. C corporations are subject to the double taxation concepton corporate earnings. This is where corporate earnings are taxedat both the entity level and a second time when the earnings aredistributed to shareholders in the form of dividends. Let's discussthis double taxation for a moment and put some numbers to it. Let'ssay that a C corporation has $1,000,000 in taxable income. Underthe new tax law it will pay a tax at the rate of 21% or $210,000.Let's then say that the C corporation then distributes theremaining $790,000 to its shareholders in the form of dividends.The shareholders will pay a second tax at the rate of 20% or$158,000. Thus, the IRS has received $368,000 in tax on the$1,000,000 of income or a combined tax rate of 36.8%. If thecorporation was an LLC or was eligible and made an S corporationelection, the tax rate would be 20% or $200,000. The tax savings is$168,000 by making the S election or being an LLC. S corporationsare pass through entities. So are partnerships, limited liabilitycompanies, limited partnerships, and limited liabilitypartnerships. It is usually, but not always, advantageous for astartup business to be a pass through entity. While the income froma pass through entity is taxed to its owners, any losses from thebusiness also pass through. Losses are very common in the earlyyears of a startup. The owners want to deduct these losses againstany other income they may have. In my experience, this ability todeduct the losses is just as important as avoiding double taxation.In sum, it is not so much about the income as it is about thelosses. What do you think?
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