Michelle Roberts

S Corp Vs C Corp: What’s the Difference?

by Michelle Roberts | Sep 17, 2020 | Business Entity, Business Formation

Corporations are probably the most widely talked about business types in the United States – if not the world at large – and yet, also the most complex and yet easily misunderstood. Many new business owners who would otherwise be in sole proprietorships or even partnerships believe that the first thing they must do when forming a business is to incorporate – and this likely may not be the case early on; at the same time, there are those who believe that incorporating is for Fortune 500 companies and that there are no benefits for small businesses – and that may also not be true.

In order to determine whether forming a corporation is appropriate, it’s necessary to ask three questions:

Do you have assets that need to be protected?
Are you staying in business for the foreseeable future?
Are you going to be (or willing to down the road) giving up/selling ownership stake in your company as a means of capital gain?

If the answer to any or all of these is yes, you should form a corporation.

A corporation is a business entity that is legally separate from its owners. It has the right to enter into contracts, take legal action against others, give and receive loans, own assets, hire workers and pay taxes.

One of the most significant things about a corporation is its limited liability. That is, shareholders have the right to participate in the profits through stocks and paid dividends but are not held personally accountable for the company’s debts or legal issues that may arise.

There are two types of corporations – S Corporations and C Corps – to be discussed here:

An S Corporation is a business entity that is federally taxed in a certain way. It is taxed as a pass-through entity by the IRS. This means that the S Corporation gives out stock to shareholders they are protected from liability just as they would be if they had an incorporated business. That means that if something bad happens to the business, the shareholder’s personal bank accounts cannot be tapped.

Each shareholder is subject to their own tax rates on their shares, on individual returns.

It is necessary to point out that the IRS does have a list of requirements to meet S Corporation status:

Be US-based
Have only allowable shareholders including individuals, certain trusts, and estates and may not include partnerships, corporations or non-resident alien shareholders
Have no more than 100 shareholders
Have only one class of stock
Not be a company such as a financial institution, insurance company or do any international sales.

There are a lot of advantages to S corporations, especially if you change structure or transfer ownership.

On the other hand, if you make a simple mistake with your taxes, it can cause you to lose your S corps status. Additionally, the IRS pays more attention to S corps to make sure that everything is properly reported. There are several tax obligations that can make S corps tricky – as such any navigation through the formation of this type of business entity should not be undertaken without a professional advisor such as Dunham Tax Professionals.

The other type of corporation is C Corporation. A C corporation is a business entity that is taxed separately from its owners. Businesses are incorporated differently in all 50 states. All C corps are required to issue financial statements.

Whereas S-Corporations tax shareholders individually, in C Corporations the business and owners are taxed completely separately.

Key features of the C Corporation are:

Limited liability – if something bad happens to the business, it’s seen as a separate entity from its owners and founders. This can protect business owners, so they are not liable if things go wrong.
Easier to raise capital – C corps are attractive to employees because of stock options. These options can help lure in top notch employees, especially when the business is first starting out and there aren’t a ton of funds for giant salaries.

C Corps have different requirements than other business entities. You must fill out more paperwork. In fact, you’re required to hold formal shareholder meetings and take notes on them. You need to spend more time dealing with taxes and nitty-gritty details than for other business entities. The corporate tax forms can be so difficult to fill out that you may need to get a business accountant, though this is a good idea no matter what kind of business you have.

As always, it’s best to consult a professional like those at Dunham Tax Professionals. Make an appointment today.

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To LLC or Not to LLC: That is the Question

by Michelle Roberts | Sep 15, 2020 | Business Entity, Business Formation

A previous post discussed the pros and cons of sole proprietorship in business. However, it may be the right fit for your business to form a Limited Liability Company – or LLC – which is a legal form of a company that provides protection and limited liability to its owners. As such, the owners are not personally liable for the company’s debts or liabilities.

LLCs are in fact, the easiest and most flexible business entities to create, and although the requirements for LLCs may vary by state (always consult a professional such as Dunham Tax Professionals to make sure you understand your state’s requirements), there are generally some commonalities across the board. The very first thing owners or members must do is to choose a name.

Once that’s done, the articles of organization must be documented and filed with the state. These articles establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC. Other information included on the documents includes the name and addresses of the LLC’s members, the name of the LLC’s registered agent – owner/filer – and the business’ statement of purpose.

The articles of organization must be accompanied by a fee paid directly to the state. Paperwork and additional fees must also be submitted at the federal level to obtain an employer identification number – or EIN.

From a tax standpoint, LLCs are generally flow-through – which means that profits and losses fall to each member of the company and are reported on individual returns. The LLC as an entity does not pay taxes – which, however, may also prove to be a real disadvantage, though, depending on your perspective or circumstance.

Other disadvantages to the LLC may include: as a member of an LLC, you cannot pay yourself a wage or salary; high renewal fees or publication requirements can be pricey, depending on your state; and investors may be more likely to put their money into a corporation, making it harder to raise financial capital.

It’s always best to consult a professional to help you through difficult or confusing financial matters. Schedule an appointment with Dunham Tax Professionals today. We can help you through every step of the way.

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Pros and Cons of Sole Proprietorship

by Michelle Roberts | Sep 13, 2020 | Business Entity, Business Formation

So, you’re ready to start your own business, you say? You’ve got an idea for a great product or service and you’re good to go, or so you think. Business owners have a lot to think about already, but at the onset, consideration must be given to a couple of factors – because now it’s time to get legally recognized as a business.

A sole proprietorship is when someone owns and runs a business by themselves. This structure is the simplest and the easiest to understand. In order to form a sole proprietorship, you don’t need to take any formal action. You are a sole proprietor if you are selling your services for yourself and by yourself.

Of course, there are some definite advantages for the sole proprietor: With no one else to answer to, the profits are certainly all for you. As the sole proprietor, you maintain total control and flexibility to run the business as you see fit; sole proprietors require less capital to cover startup costs and creditors are more likely to extend credit if needed.

It is noteworthy that from a tax standpoint, there is no differentiation between you and your business, so you are taxed as one. You just use a Schedule C and a Standard Form 1040.

All of that could be great, but it’s also important to go over the same information from a different perspective. If you decide to go it alone as sole proprietor, there are some disadvantages to consider with that: With no one else to answer to, you assume full liability of the business, as well – all your debts are yours alone and creditors can go after your personal property to satisfy a claim if your business assets aren’t enough; banks may be reluctant to give loans due to higher turnover rates and usually smaller assets; even if you required less capital to startup, it may be more difficult for the sole proprietor to raise money for the long term needs of the business.

If this still sounds confusing, let Dunham Tax Professionals help you make sense of it all. Schedule an appointment today.

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Tax Projections

by Michelle Roberts | Sep 4, 2020 | Tax Projections, Taxes

As we enter the final quarter of the year, many of us are already thinking forward to tax time. Now is the time to look at your full financial picture while there is still time to make financial decisions that will impact your tax burden.

It is important to contact a professional to complete your tax projection, so you know where you stand for the current tax year. A tax projection is like a tax return. It uses your current income and expenses to project your taxable income for the entire year and allows you to estimate your tax due.

A tax projection requires that an individual or business bring together all of the documents that are regularly included on a tax return, which generally include:

Current paystub showing salary, withholdings, and retirement contributions.
Estimated business income and/or year-to-date financial statements from sole proprietorships, partnerships, corporations, and rental properties.
Gains/losses on sales of stock, business interests, tangible business property, and/or rental real estate transactions.
Anything else included on last year’s tax return that applies again this year.
Changes, if any, to your finances that may have occurred since your previous tax return was filed.

IRS Current Status and Reminders

by Michelle Roberts | Sep 2, 2020 | Taxes

The Internal Revenue Service reminds taxpayers and tax professionals to use electronic options to support social distancing and speed the processing of tax returns, refunds and payments.

To protect the public and employees, and in compliance with orders of local health authorities around the country, certain IRS services such as live assistance on telephones, processing paper tax returns and responding to correspondence continue to be extremely limited. Any tax return which requires review, whether it was filed electronically or on paper, may also take longer because many review processes cannot be done virtually. While some volunteer tax preparation sites are operating at a reduced capacity, most remain closed until further notice.

There will continue to be delays in phone calls – both those answered and returned – and other communications – both email and written correspondence via United States Postal Service – which may also include notices of liens, garnishments and other notices of balances, penalties and fees as applicable.

The IRS indicates that the website – IRS.gov – remains the best source for questions about tax law, checks on refund status, tax payments and other services, and automated phone lines which handle most taxpayer calls, also remain available – which also have an option to reach a customer service representative eventually, but that callers should continue to expect long waits due to limited staffing.

Payroll Tax Deferral: The Bottom Line

by Michelle Roberts | Sep 1, 2020 | Payroll, Taxes

The COVID-19 Pandemic has certainly had a financial impact on us all: Businesses have been closed – some of them permanently – countless employees have been furloughed if not let go entirely, and we’re afraid of what might happen next.

In a recent Executive Order, the President has suspended the Federal Payroll Tax, deferring the 6.2 percent payroll tax that funds Social Security in hopes of bolstering consumer spending and ultimately stimulating an economy that is still struggling under pressure from the systemic, lasting shutdowns across the nation.

But what does all that mean for the American people?

First, a little information is necessary, here: Every payday, 7.65% of your wages are subtracted from your paycheck to fund Social Security and Medicare (6.2% for Social Security; 1.45% for Medicare). Your employer – or if you are the business owner – pays an equivalent amount of tax.

It’s noteworthy that employers already can defer payment of their share of Social Security taxes on wages paid through the end of the year. For 2020, the Social Security tax is only levied on the first $137,700 of earnings; however, an additional 0.9% Medicare tax is collected on wages over $200,000 for the year.

Now, under the Executive Order, under the president’s executive order, Social Security taxes (6.2%) won’t be taken out of your paycheck if your pre-tax bi-weekly salary is $4,000 or less – for the remainder of 2020. This means that someone making $10 per hour and working 40 hours per week will get about $25 more per week, or around $100 per month. From September through December, that will add up to about $446. A full-time worker making $15 per hour would get approximately $37 more per week, $149 more per month, and $670 by the end of the year. For someone making $25 per hour, the savings will be about $62 per week, $248 per month, and $1,116 through December, and so on.

But – and this is especially important to all taxpayers – the IRS reports reiterate that this Executive Order only applies to the rest of 2020, and as such, postpones the due date for these taxes until April 30, 2021. After that date, penalties, interest and “additions to tax” will begin to accrue.

The IRS guidelines do state that Employers – referred to as the “affected taxpayers” in the documentation issued – “may make arrangements to otherwise collect the total applicable taxes from the employee.”

But make no mistake; the IRS will collect those deferred and accrued taxes as soon as they are legally able to do so.

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