What is the company system🌻
The main types of companies include Sole Proprietorship, Partnership, Limited Partnership (LP), Limited Liability Company (LLC), and Incorporated Company (INC). Corporations are divided into C-Corp and S-Corp tax forms. Most of us Chinese entrepreneurs and businesses are small companies. Most of the companies on the market are C-Corps, which are often referred to as INCs. This type of company pays more taxes than other types of companies.
Sole proprietorships and partnerships are unlimited liability companies, which means that debts owed by the company can be repaid without limit by the legal person or the owner's personal property.
🌻NoDifferences between companies
Joint-stock companies are divided into many types, namely joint-stock companies, joint-stock limited liability companies and limited partnerships. Limited means that the debt owed by the company is limited to the capital invested by the shareholders and cannot be recovered to the personal property of shareholders or investors. However, shareholders, partners or business leaders still have unlimited liability for repayment of taxes owed by the company.
A joint stock company refers to a C-Corp. This type of company is subject to double taxation, namely corporate income tax on the company's profits, and personal income tax paid by shareholders when the company distributes dividends. For example, C-Corp filed taxes and made a profit of 1 million in 2014. After deducting the corporate tax, the company distributes a dividend of 500,000 yuan to the owner shareholders, and the owner shareholders have to pay a dividend tax of about 20%. This is called double taxation. In addition, because of the new Obamacare tax introduced in 2013, if the owner's family income exceeds 250,000, the dividend tax will be subject to an additional 3.8% Obamacare tax. Add in state taxes and local taxes, and most of the revenue has been turned over to the government.
In fact, taxpayers have ways to reduce such huge taxes as mentioned above. A corporation can choose the corporate tax category of S-Corp.
S-Corp is a "tax payment intermediate system" (Pass through entity), without the burden of double taxation. The company's profits and losses are reflected on the personal tax return through the K-1 form. In other words, the owner does not need to pay corporate income tax and only needs to report an income of 1 million yuan on his personal tax form. If you lose money, you can also deduct other personal income.
Sole proprietorships, partnerships and limited liability partnerships, like S-Corp, are also intermediate tax systems. The company's profits and losses are reported directly using Form C, or reflected on the personal tax form using Form K-1, which has a tax-saving effect on income tax. basically the same. However, sole proprietorships and single-shareholder limited liability companies are required to pay a self-employment tax of 15.3%.
Multiple shareholder corporations, partnerships, and limited liability partnerships use Form 1065 to file taxes. General partners and shareholders of a limited liability company are both considered self-employed and are subject to a self-employment tax of 15.3%.
C-Corp also has ways to reduce its tax burden, such as converting all profits into the salaries of responsible shareholders. The tax effects are roughly the same for the above companies. Although they do not have to pay corporate income tax, they have to pay a 15.3% payroll tax. In comparison, as long as an S-Corp pays shareholders and principals a reasonable salary that is equal to the market, dividends will not be subject to self-employment tax.
Starting from 2013, shareholders of sole proprietorships, limited liability companies and partnerships will have to pay an additional 0.9% Obamacare tax if their annual personal income exceeds 250,000, while S-Corp shareholders will not have to pay dividends .
🌻Example
Income in 2014 was 1 million. If you file taxes as a sole proprietorship, limited liability company or partnership, you will have to pay a Social Security tax of 12.4% on $117,000, which is a tax of $14,500, and a Medicare tax of 2.9%, which is a tax of $29,000, plus additional Obamacare tax. 0.9%, or $6,750, totaling $50,250.
If the owner chooses the S-Corp company form, he will be given a reasonable salary of 200,000 yuan, and the remainder will be used as dividends. Dividends are not subject to self-employment or payroll taxes. In this way, his salary pays social security tax of 14,500 yuan and health insurance tax of 5,800 yuan, totaling 20,300 yuan. It can be seen that the owner can save nearly 30,000 yuan in taxes just because of the company's tax form.
Incorporated companies and limited partnerships can apply to convert into corporations and S-Corp companies using Form 8832 and Form 2553. As long as you are a citizen and have a green card status, and there are no more than 100 shareholders, etc. In addition, using company divisions to file taxes, such as S-Corp filing for operations and profit departments, and C-Corp filing for management and balance-of-payments departments, is also a good business tax saving strategy.