When creating a business entity, you face a difficult decision between creating an S Corp vs C Corp under the new tax laws. The choice you make will undoubtedly have implications on the amount of state and federal taxes you may owe. In this regard, it is essential to understand the difference between the two entity types before you decide. This will make you better equipped to compare S Corp vs C Corp under the new tax laws.

What is a C-Corporation?

A C-corporation is a business entity which individual shareholders own. Specifically, the shareholders have limited liability protection from lawsuits and business debts. Keep in mind, both C and S corporations are initially set up with the Secretary of State as C-corporations. The corporate executives make decisions about day-to-day business operations. Shareholders elect a Board of Directors which provide management and policy oversight and recommendations.

To form a corporation, you must file Articles of Incorporation with the California Secretary of State. Also, corporations must keep up certain formalities once the corporation is set up. In this regard, it is critical to comply with these required corporate legal formalities.

What is an S-Corporation?

An S-corporation must take specific steps to get S-corporation status. As mentioned above, both C corporations and S Corporations are initially set up with the Secretary of State as C Corporations. If the owners of the corporation want to have an S Corporation, the owners of a corporation must then choose to structure their company as an S-corporation by filing an S-Corp election form with the IRS. S-corporation allows the company’s owners to get pass-through taxation benefits. As an S-corp, the owners do not have to pay company taxes and self-income taxes. Limited liability restrictions also apply to S-corp shareholders. S-corporations must also keep up similar annual filing documentation and meet regulatory requirements to keep their corporate status.

S Corp vs C Corp Under the New Tax Laws

As you can see, a significant disadvantage of holding your company as a C-corp is the double-taxation. As a result, the corporate business pays taxes and the owners of the S corp pay income taxes as well. Under the new tax plan, there will be significant changes for both C-corp and S-corp taxation. Key concerns businesses must address include the following:

  1. The new C-corp income tax rate is 21%.
  2. Owners of S-corporations will be able to deduct 20% of their business income on their personal tax returns.

Although this sounds like it would be great news for business owners, many small business owners may, in actuality, pay higher taxes.  C-corps are still subject to double taxation; however, the new law reduces the corporate income tax rate from 35% to 21%. While the new tax law will undoubtedly provide significant savings for many mega-companies,  generally the tax change will most likely not help the average small corporate business owner reading this blog article. The 20% tax deduction for S-corp applies to businesses with an annual income of $157,500 for single filers and $315,000 for married joint filers.

When you compare S Corp vs C Corp under the new tax laws, A People’s Choice recommends you work with an accountant. A CPA or accountant will help you decide which corporate status is best for your business. Once you have decided which is best for you, we can help you draft the forms you need to create a C-corp or S-corp in California. Contact us through our website or call us today at 800-747-2780 for more information.