Posts Tagged ‘choosing entity’

What type of entity should I choose? Part 6

Our Firm previously posted a five part series discussing the advantages and disadvantages for the type of entity you choose for your business: Sole proprietor, Partnership, Limited Liability Company, S Corporation, and C Corporation. In a business group I attend, members of the group wanted to see an example of the potential tax savings between the various types of entities. Below is a comparative analysis of an Insurance Agent as a sole proprietor, S-Corp, or C- Corp to illustrate how a taxpayer can reduce FICA tax. A taxpayer can reduce the FICA tax vs. a Sole Proprietor by paying low officer wages reducing FICA tax (in this example) by $17,854. In a C-Corp, the income does not pass-through to the shareholder; therefore, the income would be taxed at the entity level and individual level if the Company pays dividends. The S-Corp appears to have the smallest potential liability of the three, but taxpayers should be aware of the additional compliance costs such as: annual meetings, entity tax return, annual state filings, and bookkeeping.

Sample Insurance Agent
2010 Tax Rate
         
     Sole Proprietor   S-Corp  C-Corp
 Business Income:        
 Commissions $  425,000  425,000   425,000
 Wages     (50,000) (50,000)
 Business Expenses   (110,000) (110,000) (110,000)
 CA Corp. Tax Deduction     (3,860) (22,749)
 Payroll Tax Deduction     (3,825) (3,825)
 State Payroll Tax Deduction     (838) (838)
 Net Taxable Income- Business    315,500 256,477 237,588
 Business Taxes:         
 SS/FICA INC W/H   21,679 3,825 3,825
 Federal Corporate Tax       75,909
 CA (S and C) Corp Tax     3,905 23,014
 Total: Business SS and Corp. Taxes   21,679 7,730 102,748
 Total: Individual FED and STATE Taxes   95,503 100,666 8,497
 Total Taxes Paid  $ 117,182 108,396 111,245
 Assumptions for this Illustration:        
 FICA Tax – ER (7.65%) and EE (7.65%)        
         
 Corporate Tax Rate – 15% to 39%        
 CA S-Corp Tax Rate – 1.5%        
 CA Corporate Tax Rate – 8.84%        
 Individual FED Marginal Tax Rate  – 15% and 33%        
 Individual CA Marginal Tax Rate – 4.3% and 9.6%        
         
         

 Please note, these are simplified illustrations and when preparing actual tax Forms (1120, 1120S, and 1040) there are potential complex transactions involving basis, distributions, alternative minimum tax, etc. Please see your tax professional when considering your personal situation.

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