0:01 hello everyone so today we're going to
0:03 be quickly defining and comparing the
0:06 differences between C corporations and S
0:09 corporations so AC Corp is the most
0:11 common type of business entity in the
0:13 United States as it is a separate legal
0:15 entity set up under state law that
0:17 protects owner assets from creditors
0:20 claims also known as limited liability
0:23 AC Corp is a separate taxpayer with
0:25 income and expenses tacked tax to the
0:28 corporation and non owners if corporate
0:31 profits are then distributed to owners
0:33 as dividends owners must pay personal
0:35 income tax on the distribution creating
0:38 what's known as a double taxation so
0:40 money is taxed at the corporate
0:42 corporate level and then at the personal
0:45 income tax level now a simple example
0:48 consider a small business that has the
0:50 following earnings and they're the same
0:52 for years one through three they have a
0:55 business tax rate of 30% and a federal
0:58 income tax rate of 28 percent so they
1:00 earn a million dollars their cost of
1:03 goods sold is $150,000 their gross
1:06 profit is their 450,000 they have
1:08 another another $50,000 and operating
1:11 expenses so they have ebin or income
1:14 from operations of $100,000 now tax on
1:17 this at 30% is 30,000 so their net
1:20 income is 70 and the assumption is for
1:23 this small business $50,000 is paid out
1:25 as a dividend to the owner so you deduct
1:27 50,000 and 20,000 goes to retained
1:30 earnings right so they get taxed at the
1:33 corporate level 30 percent or $30,000
1:37 now on the personal income tax form so
1:39 now we take those earnings assuming that
1:41 this individual does not receive any
1:44 other type of salary or income from
1:47 other sources they receive $50,000 and
1:50 so they paid 28% their personal tax rate
1:54 on that $50,000 which is 14,000 so
1:57 after-tax earnings from all this money
1:59 that flowed through the entity for
2:00 starting out when they first earned
2:04 revenue - when it was paid out is
2:06 $36,000 and so this is done for all
2:08 three years okay
2:11 now the advantages of C corpse are
2:13 limited liability and limit
2:15 growth potential and the ability to sell
2:18 equity to raise money and that's that's
2:20 why all really most public companies are
2:22 I see corpse
2:25 there's no shareholder limit so there's
2:27 no limit on the amount of shares that
2:29 can be sold to the number of people and
2:32 you have the ability to enjoy tax
2:35 deductible business expenses now the
2:37 disadvantages of see corpse are the
2:39 double taxation that's the big one and
2:40 that's why I really made this video
2:43 because it remains a challenge as many
2:45 owners seeking to be paid through
2:47 dividends from the business will pay
2:50 extra it's also more expensive than an
2:52 LLC or a partnership it there's
2:54 increased regulations and formalities
2:56 and that's a steep learning curve
2:58 especially for small business owners and
3:00 there's no deduction of corporate losses
3:03 for personal tax returns because that's
3:04 done at the corporate level so there's
3:07 no flow-through right so that's why it's
3:09 a separate taxpayer that's the big
3:11 takeaway from see corpse now with s corpse
3:12 corpse
3:14 once you've incorporated you can elect S
3:16 Corp status by filing a form with the
3:19 IRS and with your state and as it is
3:21 more attractive for small business owners
3:21 owners
3:24 once applicable the profits losses and
3:26 other tax items pass through the
3:29 corporation to you and are reported on
3:31 your personal tax return so the S
3:34 corporation does not pay the corporate
3:36 tax so this is considered a flow-through
3:39 entity the S corp is not a separate
3:41 taxpayer like the C Corp it is a
3:43 flow-through entity the risk is that
3:45 owners report their share of profit and
3:47 loss in the company on their personal
3:50 tax returns in addition there is a limit
3:54 of 75 shareholders which can be a
3:55 challenge if the company considers
3:57 raising money through private placement
4:00 so that's really the big downside to
4:01 this that's why a lot of public
4:03 companies are really all private
4:06 companies our C corpse because there's a
4:08 limit of 75 shareholders because if if
4:10 there wasn't then everyone would be an S
4:12 corp really because there's so much tax
4:15 if it's related to really being a
4:17 flow-through entity you know there of
4:18 course would be logistical II
4:20 complicated with thousands of
4:22 shareholders to all reflect you know the
4:24 flow-through status but again
4:27 theoretically it would be a large benef
4:30 so consider the same business so the
4:32 business has a tax rate of 30 percent
4:34 but they don't pay that 30 percent and
4:36 the federal income tax rate on the
4:38 personal income tax form of 28 percent
4:40 is the same right so no tax is paid at
4:42 the corporate level so we make the same
4:44 amount of money a million dollars we pay
4:46 cost of goods sold of 850 gross profit
4:49 is 150,000 operating expenses of 50
4:50 thousand are deducted so our income from
4:53 operations or EBIT is a hundred thousand
4:54 dollars but that's not really all sort
4:56 of net income because we don't pay right
4:58 so that flows through all of that money
5:01 goes to our personal tax form
5:04 okay so then on our personal tax form we
5:05 have earnings of a hundred thousand for
5:07 this year and the assumption here is
5:09 also that there are no tax brackets but
5:11 I just wanted to simplify it right
5:13 because with tax brackets probably your
5:15 tax percentage tax rate would increase
5:18 between the two examples but in this
5:20 case assuming the same twenty percent
5:23 tax rate taxes on this hundred thousand
5:25 would be to twenty eight thousand right
5:28 so after-tax earnings is seventy-two
5:31 thousand dollars right so the advantages
5:33 of the S Corpse are limited liability
5:36 the same as C corpse the key benefit is
5:39 passed through taxation thus eliminating
5:41 the double taxation on distributions the
5:42 ability to raise capital by selling
5:44 shares so the same thing except there's
5:47 a limit and a once a year tax filing
5:50 requirement versus quarterly filing for
5:51 C corpse
5:53 so that logistically also saves time for
5:56 you now the disadvantages are you must
5:58 be a US citizen and a permanent resident
6:01 unlike the C Corp or LLC you have a
6:03 limited amount of shareholders or the
6:06 maximum of a hundred at the national
6:08 level in some states at seventy-five it
6:11 depends on on this so I would recommend
6:13 that you check out the laws and
6:17 sometimes it change also closer I IRS
6:19 scrutiny and high ongoing expenses and
6:21 tax qualifications can be terminated
6:24 terminated if mistakes are made and so
6:26 because you're eligible for S Corp
6:29 status there is much more scrutiny from
6:31 the IRS so you need to be careful
6:34 properly file your tax returns and if
6:35 you do make mistakes you can get
6:37 penalized by being taken away so that
6:39 status is taken away and you convert
6:41 back to us C Corp
6:44 so the difference between the two both C
6:46 and s Corpse offer limited liability
6:49 protection both require Articles of
6:50 Incorporation to be filed and both
6:52 compromised shareholders directors and
6:54 officers there are lots of similarities
6:56 but they differ in the realm of Taxation
6:59 and corporate ownership see Corpse are
7:00 subject to double taxation who are s
7:03 corpse are passed through tax entities
7:04 in addition there is no limit to the
7:07 number of shareholders for C corpse
7:09 which is most public companies whereas
7:11 there is a hundred shareholder limit for
7:15 S corpse so comparing those two examples
7:16 that we looked at so again the same
7:19 business but in this case paid at the
7:21 corporate tax there's a corporate tax
7:23 and a personal attacks whereas with the
7:24 S Corp there's only a personal attacks
7:27 right so the after-tax earnings for the
7:29 C Corp is 36,000 and the after-tax
7:32 earnings for the S corp is 72,000 now
7:35 that does a little this incorrectly
7:37 reflects it because we still have
7:39 retained earnings of 20,000 so a better
7:40 way to look at it is the amount of tax
7:42 that's paid and that's how you should
7:44 really compare your two alternatives how
7:46 much should you tax do I pay which is
7:48 cash going out of the business and now
7:51 really out of my ownership between the
7:54 two cases so with the C Corp you pay
7:56 $30,000 at the corporate tax level and
8:00 you paid $14,000 at the personal level
8:02 with S corpse you don't pay at the
8:05 corporate level but you pay 28,000 at
8:07 the personal level so the difference so
8:10 really the combined tax is paid for the
8:13 C Corp is 44,000 well for the S corpse
8:16 is only 28 so that's a real cash savings
8:19 a difference of $16,000 that you saved
8:22 on for this respective business for
8:24 really $100,000 that was earned in EBIT
8:27 right so that's a real benefit for the
8:29 owner and that's why you know C s corpse
8:31 are considered very beneficial for small
8:33 business owners other than that if you
8:34 have any questions I do recommend that
8:36 you check out a lot of online resources
8:39 but if all else you can comment below
8:40 and I'll be sure to get back to you as
8:41 soon as possible
8:42 and if you did like the video please
8:44 like and subscribe to the channel for
8:46 more thank you so much and have a great day
