Question 1

Which business entity type has the lowest taxes?

Accepted Answer

S-Corporations often provide the lowest total tax burden for profitable businesses because distributions avoid self-employment tax. However, sole proprietorships/LLCs are simpler for small incomes, and C-Corporations can benefit large businesses that retain earnings or offer significant employee benefits.

Question 2

What is the self-employment tax savings from S-Corp?

Accepted Answer

S-Corp distributions (profit share beyond salary) are not subject to 15.3% self-employment tax. For example, if your business earns $200,000 and you take $100,000 salary, the $100,000 distribution saves approximately $15,300 in SE tax compared to sole proprietorship.

Question 3

Why does C-Corp have double taxation?

Accepted Answer

C-Corporations pay 21% corporate tax on profits, then shareholders pay dividend tax (usually 15-20%) when profits are distributed. This "double taxation" totals 36%+ tax on the same income. However, retained earnings avoid the dividend tax layer.

Question 4

What is reasonable compensation for S-Corp?

Accepted Answer

S-Corp owners must take a "reasonable" salary subject to FICA taxes. The IRS generally expects 40-60% of profits as salary. Too low salary triggers IRS audit and reclassification of distributions as wages with penalties.

Question 5

Should I form an LLC or S-Corp?

Accepted Answer

Start with LLC for liability protection and simplicity. Consider S-Corp election (Form 2553) when annual profits exceed $60,000-80,000 and SE tax savings outweigh additional payroll costs, corporate formalities, and potential audit risk.

Entity Type	Total Tax	Key Feature
Sole Prop/LLC	$ 151931	SE tax on all income
S-Corp	$ 153228	Distributions avoid SE tax
C-Corp (distributed)	$ 98353	Double taxation
C-Corp (retained)	$ 75853	No dividend tax

Business Entity Tax Comparison Calculator

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