Georgia Accountant on The Tax Effects of Entity Choice

Among the different ways of incorporating your business — C corporations, S corporations, and Limited Liability Corporations — there are practical reasons for choosing a given method, such as the number of shareholders or liability considerations. For many small businesses that are going to consider incorporating in Georgia, the tax advantage of the S corporation should not be overlooked.

Tax Advantages of S Corporations

As a LLC, LLP, partnership or sole proprietorship, you are subject to the 15.3% Self Employment/FICA tax on all of your net earnings. The S corporation, on the other hand, pays you a deductible salary (which is subject to FICA), and then the profits flow through your personal return via a Schedule K-1. This K-1 income allows for permanent deferral of the FICA tax. The S corporation allows small business owners to legally save taxes as long as they pay a fair and reasonable salary to themselves.

Please take a look at the following comparison. It shows the tax effects on a single year's income for a LLC, LLP, partnership, or sole proprietor vs. a C corporation, and compares it to a subchapter S corporation. Due to the way C corporations are exposed to double taxation, the payments are spread out over two years, which is not the case for partnerships or S corporations.

	LLC, LLP, Partnership, Sole Proprietorship	C Corp.	S Corp.
Income	$190,000	$190,000	$190,000
Expenses	($100,000)	($100,000)	($100,000)

Gross Profit	$90,000	$90,000	$90,000
Salary to Owner	$0	($50,000)	($50,000)
Taxable Income	$90,000	$40,000	$40,000
Entity Tax	$0	$6,000	$0

First Year
FICA/SE (15.3%)	$13,770	$7,650	$7,650
Federal & State Income Tax (25%)	$22.500	$12.500	$12.500
Tax on K-1 Profits (25%)	$0	$0	$10,000
Total Tax	$36,270	$20,150 *	$30,150

Second Year
FICA/SE (15.3%)	$0	$5,202	$0
Federal & State Income Tax (25%)	$0	$8,500	$0
Total Tax	$0	$13,702 *	$0

2 Year Tax	$36,270	$39,852	$30,150

Difference between LLC, LLP, Proprietorship and S Corporation
$36,270 - $30,150 = $6,120

* 1st year is tax on W-2, 2nd year is tax on $34,000
($40,000 prior year taxable, less $6,000 paid during the first year)

Please note this representation is only an example. It is being used for demonstration purposes; it does not take into consideration exemptions, deductions, fling status or any other significant tax matters. Your situation may not yield the same results. Please contact a tax professional before making any financial decisions.

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