C Corp vs S-Corp vs LLC - tax implications
February 18, 2023
by a searcher from Princeton University in Lenexa, KS, USA
If as a sole buyer of a new corporation via the SBA 7A Loan program, your number one goal is to pay off the loan as quickly as possible and therefore accept a small salary and no annual distributions, then isn't a C-Corp the best legal entity? A pass-through entity's ultimate tax rate is 40% WHILE a C-Corp's tax rate should be 21% thanks to the Tax Cuts and Jobs Act of 2017.
As an example, if your yearly loan amount is $200K of which $100k is principal and $100K is interest. In a pass-through entity, the tax liability of the loan would be around $40K. While is a c-corp the tax liability would be $21K or almost half. Am I missing something?
Also, after the loan is paid off would it be possible to change the C-Corp to an S-Corp?
from The University of Chicago in Chicago, IL, USA
Also, some have argued that WACC increases as tax rate decreases. Thus, WACC of C is more than that S. (I don't use WACC b/c WACC overvalues a firm. I have written articles on that).
The key disadvantage of C is, you have double tax if you wind up with an Asset sale at the back end, ^redacted suggestion will help you take out cash from C but such take-out will become an income (most likely Ordinary Income) somewhere else, and further, such withdrawal from C does not reduce double taxation in case you wind up with an Asset sale at the back end.
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
Yes, you can make an S-election later if all of the investors are eligible S-Corp shareholders. After doing so, you need to understand section 1374 built-in gain taxes over the subsequent 5 years and impacts on distributions if you have earnings and profits.