Speaker 2
that's where we'll let the attorneys kind of answer from there. But so let's talk about C Corp and S Corp.
Speaker 1
Absolutely. So a C corporation, if you form a corporation based on the federal tax laws, the way they are right now, that corporation is a entity separate from yourself and it's taxed separately than yourself. So the profit from the corporation doesn't flow on your personal tax return. A C Corp does not issue a K one to its owners. The C Corp, though, is going to pay a tax of 21% on the federal level on whatever net income is is retained into the C Corp. And that's why you're going to hear people say, well, you're double taxed on that, that income because if a C Corp has a profit of $20,000 and pays you a dividend of $20,000, the C Corp doesn't receive a deduction for that dividend and you're paying tax on that dividend. So a C Corp, they're not very popular anymore. There's reasons you would be a C Corp. There's some advantages coming, be it you want a fiscal year end or you want to really control the amount of income that flows on your personal return. So there are some reasons to be a C Corp, but they're pretty rare now with the birth of S Corp, which is a good segue to our last one we're going to talk about. When you think about an S Corp, these are as almost stands for sexy because I can't tell you how many times people say, Oh, should I be an S Corp. Oh gosh, you know, the S Corp is a hybrid entity. So if a C Corp, in a multi member or single member LLC had a baby, it would be an S Corp. Okay. So the S Corp has some attributes of a Corp, but it also has attributes of a partnership
Speaker 1
the profit flows on to a K one. So what goes on a
Speaker 1
The read, the S Corp is an election that you
Speaker 1
you don't necessarily form an S Corp. You either form an LLC, or you form a C Corp. And either one of those options, you can then elect to be taxed as an S Corp. So an S Corp is in a tax election that you make to be taxed as this hybrid entity. Now, I think you asked which one is best, and you know every every CPA is going to say it depends. Right. But here's the situation with the S Corp. The biggest tax advantage of an S Corp is that profits after you pay yourself what's called a reasonable salary. So reasonable compensation. Those profits are not subject to that 15.3% self employment tax. When you're so let me give you
Speaker 6
that example of $100,000.
Speaker 1
You have $100,000 of the profit. Let's say you're single. You're going to pay tax on that $100,000 your federal tax and self employment tax. If the S Corp has $100,000 of the profit, it has to pay the owner what's called a reasonable compensation. So let's say it pays the owner $40,000 of reasonable compensation on a W two. That $40,000 on a W two, well that's going to be subject to payroll taxes, which is the same as a self employment tax. The $60,000 remaining profit is not subject to self employment tax of 15%, 15.3%. So in that fact pattern, there's a potential $9,000 tax savings by being an S Corp.
