Robert W Morris & Company PC

Small business owners have several options when it comes to choosing the legal structure of their business. Two common tax structures are a Schedule C or an S corporation. While both structures have their advantages and disadvantages, an S corporation can offer several benefits, including liability protection and potential tax savings.

Firstly, let's define what a Schedule C and S corporation are. A Schedule C, also known as a sole proprietorship, is the simplest business structure. It is a one-person business where the owner is responsible for all aspects of the business, including any profits or losses. On the other hand, an S corporation is a legal structure that allows the business to be taxed as a pass-through entity, meaning the profits and losses pass through to the shareholders' personal tax returns.

One of the most significant benefits of an S corporation is the potential tax savings. With a Schedule C, all income is subject to self-employment tax, which is currently 15.3%. However, with an S corporation, the profits are distributed as a combination of salary and dividends, which can reduce the amount subject to self-employment tax. In other words, the business owner can take some of their profits as dividends and avoid paying self-employment tax on that portion of their income. Here in Pennsylvania, S corporation profits aren't subject to local taxes which typically saves anther 1% to 2%. This can lead to significant tax savings for business owners who have high levels of passive income.

Another benefit of an S corporation is liability protection. With a Schedule C, the business owner is personally liable for all debts and legal issues that the business may encounter. In contrast, an S corporation provides limited liability protection. The corporation itself is responsible for any debts or legal issues, not the shareholders. This means that the personal assets of the business owner, such as their home or personal savings, are protected if the business is sued or goes bankrupt.

In addition, an S corporation can offer a more professional image for the business. By incorporating, the business appears more established and legitimate, which can help attract potential customers and clients. Furthermore, some clients or customers may prefer working with an incorporated business over a sole proprietorship.

To summarize, while both a Schedule C and an S corporation have their pros and cons, an S corporation can offer several benefits, including potential tax savings, limited liability protection, and a more professional image. However, it's essential to consider the specific needs of the business to determine the best legal and tax structure for the business. Feel free to contact us to see if this structure makes sense for you.