Our client, Individual #1, is currently earning $350k in gross receipts and $175k in gross profit, respectively, from his IT consulting business. In discussions with the client, we learned he wants to transition his sole proprietorship/LLC into either an S-Corp or C-Corp. I propose his reorganization as an S-Corp as although it limits his potential for equity investment, it provides both a liability and tax shield.
Corporate Formation 1) Section 351: Since Individual will be in control (80%+ ownership) of future corporation, he will not incur a taxable event a. Liability exceptions – tax avoidance or transfer was not for a bona fide business purpose b. If liabilities are in excess of Individual’s tax basis
As the…show more content… salary, bonus, interest or rent) * However, if these payments are unreasonable, then distribution is considered a ‘constructive dividend’ and is no longer deductible * Salaries are subject to self-employment tax 3) Access to capital unlimited by number of shareholders 4) Subject to double-taxation * Corporations incur taxes at the corporate level at marginal rates; while, distributions to shareholders are taxed at dividend rate
Corporate Tax Rate Schedule
Taxable Income | Tax | < $50,000 | 15% of the taxable income | $50,000-$75,000 | $7,500 + 25% of taxable income over $50,000 | $75,000-$100,000 | $13,750 + 34% of taxable income over $75,000 | $100,000-$335,000