5 ms·

This advice is wrong. A C-corp deducts officer salaries. Officer salaries are not taxed twice in the manner the OP states. Assuming there are any profits that

by rrggrr 10y ago

This advice is wrong. A C-corp deducts officer salaries. Officer salaries are not taxed twice in the manner the OP states. Assuming there are any profits that remain after officer salaries, and assuming those profits are not kept in the business as retained earnings, and assuming the company decides to pay those profits as dividends, then they are taxed twice. A C-corp can provide a clear separation between business and business owner(s); and among various owners. Ask an attorney what to set-up and be clear with them where you think/hope your company is headed. UPDATE: Its not that other structures don't provide this, its that OPs characterization of C-Corp structure isn't right.

tvladeck 10y ago
Both of the points you brought up are not specific to c corps. Any company will list salaries as an expense on the P&L, and an LLC also provides a layer of protection between "business and business owner(s)". The first two Ls stand for Limited Liability...
beachstartup 10y ago
owners generally do not pay themselves large officer salaries, because of the w-2 tax rates which can be extremely high in a state like california. this also muddies up the discretionary compensation numbers when a potential buyer comes along and assesses the P&L on the company. this w-2 income is also taxed twice -- the state takes its cut with payroll taxes and unemployment/disability insurance. if you add sales tax into the mix, an owner is paying upwards of 50% taxes on this money if he decides to buy something nice -- not smart. to get non-payroll money out of a c-corp and into the owners' pockets, it will be taxed twice, first as corporate income and then as dividend income on the individual owners' tax return. if you have a way around this that doesn't involve laundering money offshore or to shell companies, i'm all ears. for a smaller, closely held private company with no institutional investors, an LLC taxed as a partnership or something similar (not an s-corp) will yield a lower effective tax rate for the owners of the company and more closely represent what actually is going on. investors want to invest in a delaware c-corp usually because all of the laws and case precedence are favorable to them.
- justinc8687 10y ago
  Why would you not recommend S-corp taxation (LLC taxes as S-corp) for this purpose? Doesn't that give you the best of both worlds (easy management with pass-through taxation)? There are obviously headaches over an LLC (have to keep books, corporate meetings, etc...), but I feel those are outweighed otherwise by the savings by taking at least part of your income as S-corp distribution vs wages. You clearly feel differently, I'm just curious why.
  - beachstartup 10y ago
    the managerial overhead is not worth the difference (remember the professional fees required to run all this stuff). if my company made more revenue, i'd probably feel differently. at the end of the day it comes down to how much revenue vs. overhead vs. capital structure you feel comfortable with.
    - tptacek 10y ago
      We converted from filing as LLC to LLC filing as S a few years into the company, and it didn't really change much for us. Either way, when you get significant revenue, you need an accountant to do your taxes. I don't remember our costs going up significantly after we switched.
      - beachstartup 10y ago
        > We converted from filing as LLC to LLC filing as S a few years into the company, and it didn't really change much for us. yeah, so why switch if you don't have to
        tptacek 10y ago
        You don't have to, but we did to get W2 payroll for principals.
    - justinc8687 10y ago
      I've found in my case, I pay about $2k/yr to have an accountant manage this for me, but save about 4-5k in taxes, so it's worth it financially.
tptacek 10y ago
For small startups nothing has led me to believe that the actual taxation for a C-Corp is a major problem. But everything I've learned has suggested that being a C-Corp will definitely add significant tax expense to your life, because C-Corp taxes are complicated and LLC taxes are not. So then the question is: of what possible benefit is a C-Corp to a small business that hasn't taken funding from an investor that requires share classes? I'm not aware of any protection or separation that a C Corp provides that an LLC doesn't. So far as I know, the sole practical reason to incorporate a C Corp is to get share classes, which startups need pretty much solely to satisfy venture capital investors.
- rrggrr 10y ago
  LLC members agreements, like any contract, are expensive to litigate and onerous to read, comprehend and retain. A twelve year old understands share ownership, a concept enshrined in law and precedent after centuries of use. I'm wiling to bet that on balance lawyers make more money off LLC disputes and creation than C-Corp's.
  - tptacek 10y ago
    I doubt the lawyers made much money off the creation of Matasano, since we 1-clicked it off an order form for Delaware LLCs offline.
- rpedela 10y ago
  One thing I didn't realize until recently is that when applying for a home loan, they perform an audit of your business in addition to your personal assets if you have an LLC. The reason is because the company's profits pass through to the owners so it is considered personal income from the perspective of the lender. However with a C Corp everything is separate which saved me from a business audit.
  - tptacek 10y ago
    I'm not sure what that means, but I had no trouble buying a house in 2005 right after we started Matasano. What's an "audit of your business"?
nodamage 10y ago
Huh? If a C-corp makes $200k and pays out $100k as salary to the sole owner/shareholder and keeps $100k in the business, the shareholder will pay payroll taxes and personal income tax on that $100k salary, and the corporation will pay corporate income tax on the remaining $100k. OPs characterization seems correct to me. (That you pay taxes once at the corporate level, and once at the personal level.)
- bildung 10y ago
  You pay once at the corporate level and once at the personal level, but apparently not twice on the same dollar (which was how I understood tvladeck's comment).
- rpedela 10y ago
  The C corp's money is not owned by the shareholders until it is distributed as a dividend. That is where the double tax comes into play since that money was already taxed at the corporate level and then it will be taxed again at the personal level.
- rrggrr 10y ago
  Double taxation means twice on the same dollar. The $100k in the business gets taxed at the business rate once. Its never taxed again unless distributed as dividends, unless you count payroll taxes if paid out as salaries.

by rrggrr 10y ago

tvladeck 10y ago

Both of the points you brought up are not specific to c corps. Any company will list salaries as an expense on the P&L, and an LLC also provides a layer of protection between "business and business owner(s)". The first two Ls stand for Limited Liability...

beachstartup 10y ago

owners generally do not pay themselves large officer salaries, because of the w-2 tax rates which can be extremely high in a state like california. this also muddies up the discretionary compensation numbers when a potential buyer comes along and assesses the P&L on the company. this w-2 income is also taxed twice -- the state takes its cut with payroll taxes and unemployment/disability insurance. if you add sales tax into the mix, an owner is paying upwards of 50% taxes on this money if he decides to buy something nice -- not smart. to get non-payroll money out of a c-corp and into the owners' pockets, it will be taxed twice, first as corporate income and then as dividend income on the individual owners' tax return. if you have a way around this that doesn't involve laundering money offshore or to shell companies, i'm all ears. for a smaller, closely held private company with no institutional investors, an LLC taxed as a partnership or something similar (not an s-corp) will yield a lower effective tax rate for the owners of the company and more closely represent what actually is going on. investors want to invest in a delaware c-corp usually because all of the laws and case precedence are favorable to them.

justinc8687 10y ago
Why would you not recommend S-corp taxation (LLC taxes as S-corp) for this purpose? Doesn't that give you the best of both worlds (easy management with pass-through taxation)? There are obviously headaches over an LLC (have to keep books, corporate meetings, etc...), but I feel those are outweighed otherwise by the savings by taking at least part of your income as S-corp distribution vs wages. You clearly feel differently, I'm just curious why.
- beachstartup 10y ago
  the managerial overhead is not worth the difference (remember the professional fees required to run all this stuff). if my company made more revenue, i'd probably feel differently. at the end of the day it comes down to how much revenue vs. overhead vs. capital structure you feel comfortable with.
  - tptacek 10y ago
    We converted from filing as LLC to LLC filing as S a few years into the company, and it didn't really change much for us. Either way, when you get significant revenue, you need an accountant to do your taxes. I don't remember our costs going up significantly after we switched.
    - beachstartup 10y ago
      > We converted from filing as LLC to LLC filing as S a few years into the company, and it didn't really change much for us. yeah, so why switch if you don't have to
      - tptacek 10y ago
        You don't have to, but we did to get W2 payroll for principals.
  - justinc8687 10y ago
    I've found in my case, I pay about $2k/yr to have an accountant manage this for me, but save about 4-5k in taxes, so it's worth it financially.

tptacek 10y ago

For small startups nothing has led me to believe that the actual taxation for a C-Corp is a major problem. But everything I've learned has suggested that being a C-Corp will definitely add significant tax expense to your life, because C-Corp taxes are complicated and LLC taxes are not. So then the question is: of what possible benefit is a C-Corp to a small business that hasn't taken funding from an investor that requires share classes? I'm not aware of any protection or separation that a C Corp provides that an LLC doesn't. So far as I know, the sole practical reason to incorporate a C Corp is to get share classes, which startups need pretty much solely to satisfy venture capital investors.

rrggrr 10y ago
LLC members agreements, like any contract, are expensive to litigate and onerous to read, comprehend and retain. A twelve year old understands share ownership, a concept enshrined in law and precedent after centuries of use. I'm wiling to bet that on balance lawyers make more money off LLC disputes and creation than C-Corp's.
- tptacek 10y ago
  I doubt the lawyers made much money off the creation of Matasano, since we 1-clicked it off an order form for Delaware LLCs offline.
rpedela 10y ago
One thing I didn't realize until recently is that when applying for a home loan, they perform an audit of your business in addition to your personal assets if you have an LLC. The reason is because the company's profits pass through to the owners so it is considered personal income from the perspective of the lender. However with a C Corp everything is separate which saved me from a business audit.
- tptacek 10y ago
  I'm not sure what that means, but I had no trouble buying a house in 2005 right after we started Matasano. What's an "audit of your business"?

nodamage 10y ago

Huh? If a C-corp makes $200k and pays out $100k as salary to the sole owner/shareholder and keeps $100k in the business, the shareholder will pay payroll taxes and personal income tax on that $100k salary, and the corporation will pay corporate income tax on the remaining $100k. OPs characterization seems correct to me. (That you pay taxes once at the corporate level, and once at the personal level.)

bildung 10y ago
You pay once at the corporate level and once at the personal level, but apparently not twice on the same dollar (which was how I understood tvladeck's comment).
rpedela 10y ago
The C corp's money is not owned by the shareholders until it is distributed as a dividend. That is where the double tax comes into play since that money was already taxed at the corporate level and then it will be taxed again at the personal level.
rrggrr 10y ago
Double taxation means twice on the same dollar. The $100k in the business gets taxed at the business rate once. Its never taxed again unless distributed as dividends, unless you count payroll taxes if paid out as salaries.