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What are the tax differences between a C corp and an S corp?

As you prepare to start your business in Minnesota, one of the first and biggest choices you have to make is the legal structure. If you know already that you want to incorporate, you have a further step to take in choosing whether a C corporation or an S corporation would be best. Although they have many similarities, there are some tax differences that may be worth your consideration.

According to Fox Business, as an S corporation, your company will pay no federal income tax, so estimated tax would not apply. However, a C corporation does have to make federal estimated tax payments, which are based on the company’s profits.

The C corp must pay taxes at the corporate level through a standalone return. If your company is an S corp, the tax return is still filed through the company, but the profits pass to your own personal income tax return through IRS Form 1120S K-1. Consequently, you are paying at the individual level. If your company sustains any losses, though, it lowers shareholders’ tax liability.

If you are an employee owner of a C corp, you may have life insurance and other fringe benefits through your company, but this is not an option for you as the owner of an S corp.

You may not draw funds from the profits of a C corp without paying taxes on it as a dividend, except in the case of reimbursing business expenses or repaying a loan. If you are receiving reasonable wages from your S corp, you have the option to draw funds from your profits.

There may be other tax advantages or liabilities related to the type of corporation you choose, as well as many other considerations. Therefore, this general information should not be interpreted as legal advice.

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