What is the difference between S Corp and C Corp

Aug 23, 2014

S Corp is very advantageous when compared to C Corp. The difference between an S Corp and an LLC is not that big.

The advantage of the S Corp is that you will be drawing a salary, hence you only will be paying FICA payroll taxes on your salary. A single-member LLC is a disregarded entity, meaning that all of the profits will be subject to self-employment tax (the equivalent of FICA payroll taxes, same percentage, SE tax is reported on 1040).

The advantage of the LLC is that you have fewer formalities. The only return you will have to complete with the IRS is a schedule C with your 1040, which is an income statement (you would have to produce a balance sheet to the Secretary of State of the place you incorporated, however). With an S Corp, tax compliance is more expensive: Your S Corp would file its own tax return (on Form 1120S, which is the whole shebang: Income Statement, Balance Sheet, Reconciliation book-to-tax, Retained earnings changes), then issue you a K-1 which you would then report on your 1040 using schedule E. My guess is that the SE tax benefit would outweigh compliance cost (making the S corp more advantageous) once your annual profit exceeds $100,000.

If you have employees, (although not a directly related issue), you probably you already have the complexity that comes with an S Corp, so you might as well use an S Corp structure. If your wife is an employee, you’ll need to remit FICA taxes and income tax withholdings (local + federal) most likely quarterly (if you expect your employment tax liability to be $1,000 or more in a full calendar year, you would have to file form 941 quarterly, if less than $1,000 form 944 annually) + local reporting. You would likely need a payroll provider (ADP or Intuit Payroll).
From: “However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business”, then you have a partnership (or can elect S Corp), a disregarded single-member LLC would not be possible (as far as the IRS is concerned). A partnership return would be similar to an S corp return.

Reading the page mentioned, I also conclude that a spouse can NOT be an independent contractor. Unfortunate, since it would have simplified things.

When it comes to the Dutch “partner”, I invite you to do a search on the difference between employees and independent contractors. If he/she is an employee, you would have to pay payroll taxes to the Dutch authorities (wouldn’t that be fun). If he/she is an independent contractor, you wouldn’t have anything to do if the services are provided from the Netherlands (if from the US, then file a 1042-S with a 30% withholding, that they’ll likely get back by filing a 1040NR claiming treaty benefits).

4) Since you are in NC (and you are operating the company, as opposed to having people in Wyoming operate the company for you), yes, you would have nexus in NC and therefore you would have to register your company as a foreign company with the NC secretary of state. My understanding is that Delaware is really good for really big corporation due to the abundance of legal precedent which can cause a lot of certainly for their legal departments. I don’t think Delaware is for you. Wyoming is really cheap to maintaining a company there (in most cases, you have a franchise tax of $50/year. Add another $100/year for the registered agent). I’ll let you compute the cost of Wyoming + NC (as a foreign company) vs incorporating directly in NC.

NO, you do not want to “employ” your Dutch friend. He can not be a US employee unless and until he is physically in the US to work – and I don’t think you want to take care of Dutch payroll taxes. Paying a foreign company does not cause issues (unless we spoke about paying interest, dividends or royalties (for some copyright/patent they previously sold you) in which case a 1042-S would be warranted). You want to pay him as an independent contractor (and it will then be up to him to comply with Dutch withholding/tax laws)

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