The prevailing attitude among most tax advisers is that if given their druthers, small businesses should be established as an S corporation or LLC. Setting up a business as a “C” corporation, with its seemingly inefficient potential for double-taxation (product placement!), is often not given much in the way of consideration.
According to a recent study, however, there are nearly $1.6 million small businesses currently operating as C corporations. With treatment as an S corporation or LLC readily available to most taxpayers, why would so many businesses opt for the supposedly inefficient taxing regime imposed by subchapter C?
As illustrated by this excellent article by Martin A. Sullivan (Tax Analysts) — The Small Business Love-Hate Relationship With Corporate Tax — there are more advantages to operating as a C corporation then most realize, including:
- the graduated tax rates available to corporations under Section 11;
- the current 15 percent rate on qualified dividends;
- the ability for a shareholder to defer individual taxation on undistributed earnings of the corporation; and
- advantageous rules regarding tax-free fringe benefits for shareholder-employees when compared with S corporations and LLCs.