Question posed to the Wall Street Journal Small Business Video series: as personal tax rates increase, isn’t it a good idea to form a C corporation and be taxed at the corporate rate?
The answer: for most small businesses, no. Most small businesses would be better as an S corporation or an LLC.
See the advice from Michael Hanley, CPA and partner of Merl & Hanley. He explains that although personal and corporate tax rates may be similar, the actual taxable income will often be less on a personal return.
The taxable income of the business, if a C corporation, would be taxed at that amount. However, if the company is an S corp, that amount passes through to the individual, who then can apply a series of deductions to that amount, such as the standard deduction, mortgage interest dedection, etc. All this brings he taxable amount down.
