Aside from legalities here are some things to consider:
- If you plan to take out significant amounts of profits (cash) above what you would consider a "reasonable salary" for the work that you are doing for the corporation (as officer), an S-Corporation may be more beneficial because once a reasonable wage is paid, excess profits can be taken out of the corporation as a distribution free from self-employment taxes. If you did this in a C-Corporation the money taken out would be considered a dividend and be doubled taxed.
- C-Corporations often pay high wages rendering the corporation to have no profits and thus pay no taxes. This is perfectly fine as long as the wages paid are considered "reasonable". The IRS can challenge the wages if they believe they are in excess of a reasonable salary and reclassify them as dividends. Having said this, the IRS can also challenge a S-Corporation's officer's salary if they believe the wage was too low and then they will want to reclassify the distributions taken as salary.
- Many retirement plan maximum contributions are based upon your salary. This usually negates the negative of paying payroll taxes on more wages.
- If you plan to retain profits in the corporation remember that in an S-Corporation you still have to pay taxes on that money - some shareholders may need a distribution in order to pay these taxes.
- There are many restrictions placed on S-Corporations that have not been discussed such as who is allowed to be a shareholder of a S-Corporation, how many shareholders, only one class of stock is allowed, etc.
Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.
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