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Comment by rrggrr | Hacker News Reader

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.

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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.

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.

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.

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.

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"?

Started with tax returns. Given how the rest of the personal audit went, I am sure they would have asked for more. BTW no one had trouble buying a house in 2005 which helped 2008....

I believe the maximum number of people where the pass-thru taxation can apply is different. At least that used to be the case my state.

I own a C-corp and an LLC and although I can't quote the tax prep fees off the top of my head, I don't recall them being significantly different.

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.

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.

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.

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.

> 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

You don't have to, but we did to get W2 payroll for principals.

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.

Note that although this is generally true, it is only useful advice if corporate income greatly excceds the sum of employee and officer salaries. The IRS frowns on officer salaries that are below market so you can not simply pay yourself a pittance in W-2 wages and give yourself a huge dividend. That's tax avoidance.

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...

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.)

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).

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.

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.

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