Elimination of Double Taxation
One of the biggest benefits of an S Corporation over a C Corporation is the avoidance of double taxation. The proceeds of C Corporations are essentially taxed twice: the business pays corporate income tax on its proceeds and individual shareholders pay taxes on the dividends and capital gains they receive on their shares. When a corporation's shareholders are also its primary owners, that means proceeds are taxed twice. In an S Corporation, by contrast, all of the corporation's net income passes straight through to the owners and shareholders, who pay taxes on it via their personal returns. Since personal tax rates are frequently lower than corporate rates, this can mean lower taxes. Bear in mind that the differences between S and C Corporation taxes lie not in the percentage of income that is taxed, but where it is taxed and when.
Simplified Tax Filing
An added benefit of the S Corporation is simplicity in how and when taxes are filed. Since corporate income passes straight through to the owners and shareholders, a separate corporate tax return is not necessary. You may have to include additional forms with your Form 1040 personal return, and you do have to report S Corporation proceeds separately from an C Corporation dividends you may receive, but that's generally less time consuming than preparing an entire corporate tax return.
Furthermore, although you may have to pay payroll taxes more often if you have employees, S Corporations are required to file and pay income taxes only once a year, rather than quarterly, as C Corporations do. Keep in mind that you still may have to pay quarterly estimated taxes on your individual tax return, if you're not having sufficient funds withheld from your paycheck or don't receive a regular paycheck. But again, this is a much simpler matter than a full quarterly corporate return.
In short, the S Corporation structure may offer you real benefits, in terms of lower taxes and simplified tax filing requirements. Even though S Corporation taxes still require taxation at the federal tax rate for corporations, these factors can reduce the impact of taxes on your business's financial welfare.
Whether you're considering an S Corporation, LLC, or a C Corporation, it's a good idea to speak to a business lawyer before you incorporate your business. An attorney can guide you on tax benefits as well as other considerations, like how to best limit your liability.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.