The US corporate tax system is very complex, so the taxation of a US company depends on many factors that cannot be covered in one blog. Therefore, we offer a series of articles on corporate taxation in the United States, in which we will focus on a comparative analysis of the most common corporate structures used by businesses – C-Corp, LLC and S-Corp. In the first blog of our series, we will draw parallels and highlight the main differences between these frameworks.
C-Corp is a full-fledged legal entity that can own its own assets, receive income, and pay income taxes. A C-Corp is taxed at the company level and then at the founders’ level when the profits are distributed.
The company’s federal income tax is 21%, plus state tax (0%-9%) and sales tax. The personal tax rate on dividends received from a corporation depends on the residency, income of the owner and the duration of ownership of the shares.
One of the main advantages of a corporation is the limited liability of the founders, who are not personally liable for the company’s obligations, as well as an unlimited number of shareholders, so it is excellent for activities that require the involvement of investors. On the other hand, the annual maintenance of the corporation is quite costly, and the management organization lacks the flexibility inherent in other structures.
S-Corp is a corporate structure that provides an opportunity to avoid double taxation at the corporate level and at the level of the founders. An S-Corp is also a separate legal entity, but has certain restrictions on who can be a founder (US residents only) and the number of founders.
Corporate taxation S-Corp differs from a C-Corp in that the company does not pay income tax. Instead, the profit is distributed among the founders, who are then taxed as their personal income. taxation. The income tax rate of S-Corp owners depends on their income level.
LLC is a corporate structure that combines the advantages of a corporation and a partnership. An LLC is considered a full-fledged legal entity, but can choose a type of taxation similar to a corporation or an S-Corp.
If LLC elects to be taxed similar to an S-Corp, it has the ability to avoid double taxation at the company level and at the founder level, as well as benefit from the benefits of a corporation (limited liability). In practice, small businesses, as well as businesses that do not aim to attract investors, choose this structure.
Each of corporate structures has its advantages and disadvantages, which should be considered when choosing a structure for your company. A C-Corp provides owners with protection from personal liability for the company’s obligations and the ability to attract investment, but the level of corporate tax burden, provided dividends are paid, is quite high. An LLC avoids double taxation at the corporate and founder levels and has more flexible management organization requirements, but when taxed as an S-Corp, the social contribution is paid out of the company’s entire income. The S-Corp avoids double taxation and reduces the level of taxation, but this structure is only available to US citizens and residents.
When choosing a corporate structure for your company, consider not only financial aspects and tax calculations, but also your goals, needs and future plans for business development. Also, contact our Finance Business Service team for advice and assistance in choosing a corporate structure and tax planning.