taxes - business entity

Accounting & Tax Basicsfor

Start up Business

Gary Hessenaur, C.P.C.

Hessenaur & Associates, CPA, P.C.


C-Corp vs Pass Through Entity

Income from Business• C-Corp pays their own taxes on income• Pass Through Entity owners pay the taxes

Net Losses from Business• C-Corp applies to prior year income or carries

forward to future taxable years• Pass Through Entity – Owners may offset other

taxable income, provided they have bases. • Pass Through Entity – Risks of losses being

suspended



• Responsible Party for Income taxesC-Corp the business is responsible for paying

the taxes

Pass Through Entity owners are responsible for paying taxes• Owner agreements may require business to

make distributions to pay income taxes.• Agreements difficult to enforce if business does

not have cash flow



• Need to Retain Profit in Business

C-Corp generally has more favorable tax rates on first $100,000 of income.

Some Pass Through Entities may also pay self employment taxes on income



• Are Owners Looking for Dividends or Distributions

C-Corp double taxation for dividends• Favorable tax brackets may off set

Pass Through Entity no additional taxation on dividends or distributions• May be rules on how distributions are made• Will change owners basis for later sale of

business



• Is There a Sale of Business Planned

Taxation issues can be complicated. Use professional help.

Basic Types of Business Sale• Stock or Sale of Business Entity• Asset Sale• Liquidation



• Will Owners Agree to Type of EntityOwner operated not much issue on Type of

Entity

Friends and Family investors Pass Through Entity can work well

Most Angel and VC investors do not want pass through entity



• Year End of EntityC-Corp may elect any year end

Pass Through Entity must be December year end



• Michigan Income TaxesBoth Entities are subject to Michigan Business

tax. Most likely not based on income• If gross revenue less than 350,000 no tax

required

Pass Through Entity owners will also pay state income taxes (4.3%)



• Owners fringe benefits, primarily health insurance

C-Corp fully deductible

Pass Through Entity • Fully deductible IF business income• If Loss possible no deduction

– Depends lot on other income and deductions on personal taxes


S-Corp vs LLC

• Type of OwnerS-Corp

• US Citizens or US residence.• No Corporation, Partnerships, LLC or Trusts

(some exceptions for trusts)

LLC No restrictions

• Class of StockS-Corp – Only one class allowed

LLC - No restrictions


S-Corp vs LLC

• Self Employment tax – Maximum 15.3%S-Corp – Only on wages paid (Reasonable

salary required)

LLC• All profits subject to S.E. tax• May be limited based on other SE income• Losses may offset other S.E. taxable income


S-Corp vs LLC

• Losses, At Risk RulesS-Corp shareholder losses limited to stock

basis and direct loans to company

LLC owners losses limited to equity, direct loans and loans guaranteed

Both may result in suspended losses if ownership disproportion to basis

Both allow for loss carryforwards


S-Corp vs LLC

• Later Conversion to C-CorpS-Corp

• Simple election beginning of tax year or disqualify.

• Can’t change back to S-Corp for 5 years

LLC• Need to Dissolve and Incorporate• Can be costly direct and indirect costs• Caution to avoid taxable event

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