• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

C Corp vs. S Corp vs. Sole Prop - Taxes

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

What is the name of your state (only U.S. law)? CA

I'm trying to get a better understanding of the differences between the 3 simply from a tax standpoint, disregarding the liability issues.

So, let's say David has a company, he grossed $200,000 in sales in 2013. He took home $100,000 the other $100K was spent on costs for the company.

So lets look at 3 scenarios, how much would he, and the company pay?


Sole prop:
$100,000 costs, $100,000 income.

C Corp
company spends $100,000 and gives owner (CEO) $100,000

S Corp
Company Spends $100,000 and pays owner $30K, and owner takes $70K in draws.


I'm assuming;

The sole prop would owe income tax plus self employment tax on the $100K

The C Corp would owe payroll taxes on $100,000, $0 in income tax, the owner would owe income tax on the $100K

The S Corp would owe payroll taxes on $30K, $0 in income tax, the owner would owe regular income tax on $30K then would pay a lower personal income tax on the remaining $70K.

Is that about right?
 


tranquility

Senior Member
If one person is doing all the work there is not going to be an advantage here. I won't go into all your errors but you were incautious as you wrote. The key thing to note is it is unlikely a person would earn $100K in a C-corp or SP and only have his reasonable compensation be $30K in an S-corp. You also forgot about corporate taxation for the C-corp.
 
If one person is doing all the work there is not going to be an advantage here. I won't go into all your errors but you were incautious as you wrote. The key thing to note is it is unlikely a person would earn $100K in a C-corp or SP and only have his reasonable compensation be $30K in an S-corp. You also forgot about corporate taxation for the C-corp.
thanks tranquil, I'm confused though, you said I forgot corporate taxation. If the company made $200,000 in gross sales, and spent $100,000 on cost of doing business and payed the owner $100,000, wouldn't they not pay any taxes, they made $0. correct?
 

LdiJ

Senior Member
thanks tranquil, I'm confused though, you said I forgot corporate taxation. If the company made $200,000 in gross sales, and spent $100,000 on cost of doing business and payed the owner $100,000, wouldn't they not pay any taxes, they made $0. correct?
It depends on how the money is paid to the shareholder. If its paid as salary you are correct. If its paid as dividends you would be incorrect.

Please note what Tranq explained about S-corps. A working shareholder must be paid a proper salary, with proper withholding, at fair market value. Its highly unlikely that you could get away with paying 30k in salary with 70k non-salary. The other way around, 70k salary and 30k non-salary, might fly.
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top