Should You Form an S or C Corporation?

Graph of S:C Corporation

 

 

 

 

The answer is: Do not do this unless you have consulted with an attorney and a tax professional and know exactly what you are getting yourself into. Forming an S or C Corporation makes sense only for a very small number of family child care providers.

I’ve previously written about why it’s best to be a sole proprietor and why it usually doesn’t make sense to form a partnership or Limited Liability Company (LLC).

An S or C Corporation is the most complex business entity under which to operate your child care program. When forming either of these types of corporations you must follow your state requirements which usually include: identifying corporate officers, drafting articles of incorporation and bylaws, and holding stockholders meetings. This is a lot of additional paperwork.

These corporations must pay state filing fees, annual state business fees, and higher tax preparation fees.

The main advantage of these corporations is reduced personal liability. This means that you are no longer personally liable for the debts of the business and in a lawsuit; only your business assets would be at risk. However, you can still be sued personally if you are negligent (shaking a baby or child abuse). Incorporating is no substitute for purchasing a lot of business liability insurance coverage ($1 million per occurrence and $3 million aggregate).

It’s possible to reduce your federal taxes by incorporating as an S or C Corporation. You will have to set yourself up as an employee of the corporation and pay various federal and state payroll taxes. But you can reduce your Social Security taxes by distributing some of your profit as dividends rather than as salary. There are differences in the taxes paid by an S or C Corporation. You will be better off with an S corporation if your profit is smaller.

This tax benefit comes at a price: You will owe federal and state unemployment taxes, file numerous federal and state payroll tax forms, and file quarterly estimated taxes.

However, the biggest drawback to being a corporation (other than the additional record keeping and paperwork) is you lose the ability to deduct house depreciation. This can be a major loss of a business deduction. It can be overcome but only if your profit is high enough (perhaps more than $30,000 per year).

This is only a brief summary of S and C Corporations. You should learn much more about these entities before making a decision to incorporate.

For a detailed discussion of all the pros and cons of incorporating your business, see my Family Child Care Legal and Insurance Guide. See also my article, The Consequences of Incorporating.

This article is part of a series about business structures. See also “Should You Incorporate Your Family Child Care Business”“Should You Form a Family Child Care Partnership?” “Should You Set Up a Limited Liability Company (LLC)?” , “Should You Form an S or C Corporation?” and “Should You Set Up a Nonprofit Corporation?”

Tom Copeland – www.tomcopelandblog.com

 Image credit: billeater.com

Legal & Insurance For more information see my book Family Child Care Legal and Insurance Guide.



Categories: Incorporation, Legal & Insurance, Starting Your Business

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1 reply

  1. The costs and benefits to being an LLC and electing to be taxed as an S corporation (no corporate meeting, or minutes requirements) varies from state to state but a local CPA can calculate if it would be worth it. Yes your compliance costs are higher with an S corporation, especially if you don’t already have an employee or two. Additionally you do loose your depreciation which might only be 300-600 in deductions, but the time space utilization of your home and other assets can be “reimbursed” that is to say expensed through the corporation(you) meaning the bulk of the tax benefits are kept and economically the same. the big benefit is the employment taxes. If the operation is looking at 50,000 in net earnings you are looking at over 7,500 in Social security and medicare taxes before you even begin to pay for income taxes. if you were treated as an S corporation your pay might be say 20,000 as wages saving you over 4,500/year which usually pays for the added costs of compliance and can usually get you an accountant year round to provide consulting, bookkeeping, financial reporting, tax planning, etc. To conclude, it may be appropriate to consider being an S Corporation, but that usually requires enough net earnings before it pays for itself through the tax savings.

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