Picking a tax structure for your business can be confusing. Business owners must be well-informed to when selecting their companies’ tax structure, as it can affect both short-term savings and taxes payable in the long run. Certain tax structures are restricted to certain types of businesses. Before selecting a tax structure, you must ensure your business type is eligible for the structure you are interested in. Two popular structures are S corporations and C corporations.
S corporations are pass-through entities, which means their income is passed directly to the owners, who pay the income taxes. The payments made to owners by an S corporation may be considered distributions or salary. S corporations can offer significant tax savings for shareholders because only the shareholder's salary is subject to employment taxes.
C corporations are not pass-through entities, which means their income is taxed at both the corporation level and at the distribution level (also referred to as “double taxation”). However, the tax rate at the corporation level is lower than it would be if distributed to the owners/shareholders. If shareholders plan to leave some profits in the business to cover future operating costs, it may be advantageous to form a C corporation.