Another big win, Section 1202 of the new tax law allows shareholders of startups to sell their stock after five years, with no tax on the first $5 million of gain. With the new lower top corporate tax rate (21%), new startups may want to consider being taxed as a C corporation. The kicker is the C corp can’t deduct the distributions via dividends. Shareholders are then taxed again when profits are distributed as dividends. First, the corporation is taxed on profits. The potential for “double taxation” is the biggest drawback to a C corp. Conversely, S corporations are limited to a maximum of 100 shareholders.
There are no restrictions on ownership for C corporations. With a C corp, the corporate entity is taxed separately from the shareholders. Pretty much any company that has gone public, or plans to go public, will likely be a C corp. From there, the owners pay taxes on their personal tax returns.Ĭ Corp (example: Apple, Start-Ups, any big corporation) The S corp also does not have a legal responsibility to pay taxes on its corporate income. As a pass-through entity, an S corp does not have to pay taxes on its corporate income. Asset protection comes in a close second when determining if you should remain simply self-employed versus setting up an S corp. Taxation is usually one of the driving factors in setting up a corporate entity. S Corp (example: Doctor, Financial Planner, Consultants) If you are earning enough to be in the top income tax bracket, you will likely benefit from tax savings and asset protection by forming one of the following corporate entities described below. Your new top income tax bracket will be 29.6% if you qualify for the 20% pass-through deduction.
You don’t have to set up any type of entity to be self-employed. By doing so, they are essentially doubling their contributions to Social Security and Medicare because they are paying as both the employee and employer. They must pay self-employment taxes in addition to regular income. Think freelancers, independent contractors, business owners and so on. This includes nearly everyone who receives income via a 1099 form or runs their own small business.
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