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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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For tax purposes, what is the best form of business entity

Resolved Question:

For tax purposes, what is the best form of business entity to have
Submitted: 8 years ago.
Category: Tax
Expert:  Merlo replied 8 years ago.

Hello kdeshotels,


The business structure that you would want to set up would depend on a number of factors, including the type of business, the size, the dollar volume,number of employees, etc. However, if you are talking in general about a small business with only one or a few shareholders, then generally an S Corporation offers you the best tax advantage.


With an S Corporation the income is not actually taxed at the corporate level. It is considered to be a flow through entity where the income is passed through to the shareholders, who then report their share of the income on their personal tax returns.


The shareholders can be paid a "reasonable" salary and on that salary they will pay the typical federal and state income taxes along with the employment taxes of social security and medicare. Any remaining earnings can then be passed through to the shareholders as dividends, and those are only subject to the federal and state income taxes, but not to the employment taxes. So the dividends themselves automatically escape the social security and medicare taxes, which combined currently account for a tax of 15.3%. That is the advantage of having the S Corp, as some of the earnings can be taken as dividends and avoid that level of employment tax.


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Thank you.




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