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quincy

Senior Member
Do you have a particular reason for opting to be a C-Corp rather than an S-Corp?
Corporations in Oregon all start off as C-Corps and can forever remain C-Corps - but at any time after formation they can be changed to S-Corps, a change generally for tax reasons.
 

LdiJ

Senior Member
Corporations in Oregon all start off as C-Corps and can forever remain C-Corps - but at any time after formation they can be changed to S-Corps, a change generally for tax reasons.
That is actually true in pretty much all states. The election to be an S-Corp is a federal one. I would still like to know why he has opted to remain a C-Corp, as it generally results in double taxation.
 

quincy

Senior Member
It sounds as if the corporation is just being formed. He may chose to change to a S-Corp after the C-Corp’s formation, for special tax treatment. He will want to go over the pros and cons of both with a professional in his area.
 

slac.in.the.box

Junior Member
The main reasons for opting to be a corporation, whether C, or S, instead of an LLC or sole proprietor were twofold: on the marketing side, I need separate trade names that made sense for the market sector they are in; and on the health coverage side, it infuriates me that corporations with employees in multiple states can shop in a different bracket of health care than individuals; it's part of the post ACA quest for decent coverage.

The difference between the C and S, seemed to be with whether liability is passed to shareholders; and I wasn't really sure, so I just picked one; I did see that it could be changed later if necessary. How to handle stocks/shares are something I don't really understand, and need to learn more about. Like I said, I opted for more reporting and paperwork, on the quest for decent healthcare. It's an unfortunate consequence of principles.

Because of diverse skill set, my current structure is a C-Corp, listed as managerial holding company, which in turn registered 2 LLC and 1 DBA; but I only maintain one set of minutes and books, the one for the primary holding company.

I tried to get CPA help, and so far, they like the simple jobs; the last one called me a Renaissance man, and said I wasn't a good fit for his firm. So I just read the IRS and state publications and try to make informed decisions.

Figured connecting to a forum wouldn't be a bad idea either ;)
 

slac.in.the.box

Junior Member
Is what LdiJ referring to, as double tax, the corporate income tax, from filing 1120; and then personal income tax from filing 1040 with a w-2 issued by corporation? I thought about that, and the main reason is that additional employees are an eventuality, so I need to learn the w-2 payroll reporting system.

So much of business is about self-discipline: forming the habits of tracking expense and income in the field; I want my final structure, so I won't have to frequently change my habits.

Perhaps, though taxed twice, there might also be double the deductions?
 

quincy

Senior Member
LdiJ prepares taxes in Indiana and Taxing Matters is a tax attorney (in Colorado I think) and they can address your IRS tax questions. But you will want to consult with a tax advisor in Oregon to see how your state treats C-Corp and S-Corp taxes and tax exemptions.

Discussing the pros and cons of C-Corp versus S-Corp, with a professional in Oregon, would be smart.

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Taxing Matters

Overtaxed Member
Is what LdiJ referring to, as double tax, the corporate income tax, from filing 1120; and then personal income tax from filing 1040 with a w-2 issued by corporation?
With a C-corporation, the corporation files a Form 1120 and pays tax itself on its own income. Currently, the net income of a C-corporation is taxed at a flat rate of 21%. Then when the corporation pays out the profit as dividends to shareholders the shareholders are again taxed on that dividend as ordinary income. The rate on that will depend on the total income that the shareholder has, which could be anywhere from 15% to 39.6%. Thus, potentially the profit of the corporation is subject to tax twice — the corporation pays a tax of 21% on it and then the shareholder receiving a dividend is then taxed anywhere from 15% to 39.6% on the it, resulting in very high tax on the income. The corporation may deduct the salary it pays you, reducing the corporate net income, but of course that salary is ordinary income to you and, furthermore, is subject to FICA (Social Security and Medicare taxes). If a C-corporation pays excessive salary to its officers the corporation deduction for the excess salary may be disallowed.

A S-corporation is taxed much like a partnership. A S-corporation files an 1120-S but pays no tax on its income. The 1120-S just provides information to the IRS on the corporation and its shareholders. The net income of the corporation then passes through to the shareholders of the corporation (whether or not dividends are actually paid) and they pay the tax on their return. The character of the income is preserved so some of the income to the shareholder may be long term capital gains (which are taxed at lower rates than ordinary income) while other income may be short term capital gain or ordinary income, taxed at ordinary rates. In addition, losses of the corporation may flow up to the shareholders, too, which is not possible with a C-corporation. Thus, with the S-corporation there is no corporate income tax of 21% to pay, and the shareholder may benefit from lower capital gains rates and losses, unlike C-corporation shareholders. With a S-corporation, there is a different salary rule for shareholders who are also officers. For them, any payments they get from the corporation are first treated as salary/wages up to the point they have received reasonable compensation for all the work they have ever done for the corporation. Again, that salary/wage is subject to FICA taxes, but is deductible to the corporation. That deduction does not, however, save the shareholder any tax as he or she has the income from the salary/wage to offset it.

Because of that corporate level tax of 21% for C-corporations it is often less costly in income tax to use a S-corporation because the S-corporation does not have to pay that tax. The S-corporation can further reduce tax with lower long term capital gains rates and the possibility of passing through losses. There are some instances where a small corporation might benefit from C-corporation status rather than S-corporation, but those are unusual. You'd want to consult a tax attorney or other tax professional to go over your plans for the business to determine what is the best way to go for you.

Note that when you form a corporation with the state by default it will be taxed as a C-corporation. You must file a separate election to be a S-corporation. This does not in any way change how the corporation is regarded under state corporation law — it is still just a corporation like any other. However, to qualify as a S-corporation, you are limited to one class of stock and no more than 75 shareholders, all of whom must be individuals and cannot be non resident aliens. Some trusts and estates with qualifying individuals as beneficiaries may also be shareholders. It is a little easier to go from S-corporation to C-corporation than the other way around, by the way, as S-corporations that used to be C-corporations have special rules to follow to ensure that the accumulated earnings of the C-corporation that were not yet paid out as dividends prior to conversion will still get taxed as dividends when paid out.
 

slac.in.the.box

Junior Member
Discussing the pros and cons of C-Corp versus S-Corp, with a professional in Oregon, would be smart.
Just reached out to tax attorney in Eugene, Oregon -- I hope he replies to the contact form on his website. Thanks for all this wonderful free advice.

However, to qualify as a S-corporation, you are limited to one class of stock and no more than 75 shareholders, all of whom must be individuals and cannot be non resident aliens.
I am world traveler. If I encounter some venture capitalist abroad, I want to be able to offer investment opportunity.
 

Taxing Matters

Overtaxed Member
I am world traveler. If I encounter some venture capitalist abroad, I want to be able to offer investment opportunity.
There are lots of ways you might do that and still qualify as a S-corporation. And if you did need to issue a second class of stock (e.g. preferred, nonvoting, etc) to make the investment work or if you needed to issue stock to someone who would not qualify as a S-corporation shareholder you could always convert to a C-corporation at that time.
 

quincy

Senior Member
Just reached out to tax attorney in Eugene, Oregon -- I hope he replies to the contact form on his website. Thanks for all this wonderful free advice. ...
I think it is important to consider not only federal taxes but state taxes as well so it is good that you have reached out to a tax attorney in Oregon.

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