All corporate structures begin as C-Corporations. However, this type of structure has downfalls, such as double taxation. In this blog post, we will discuss why we recommend trucking companies convert to an S-Corporation structure.
S-Corporations
Advantages
S-Corporations have many advantages over C-Corporations, such as:
- S-Corps do not pay federal income tax
- Low or no State Tax (Minnesota has no S-Corps tax)
- No accumulated income or personal holding company tax
- Compensation can be structured to reduce employment taxes
- Unlike LLC’s, an S-corp can do tax-free stock swaps and issue ISO’s
Disadvantages
As always, with advantages come disadvantages. Here are some of the disadvantages of a S-Corporation:
- Cannot use lowest tax rates
- Income is taxed to shareholders (whether or not it is distributed)
- Only certain persons or entities can be shareholders
- Only one class of stock may be issued (differences in voting are OK)
- All distributions to shareholders must be pro-rata
Creation of S-Corporations Subsidiaries Example
A mature corporation has several operating divisions and other appreciated assets owned by the corporation. Should a claim be made against one division, all of the assets of the corporation could be levied to satisfy the creditor. By creating separate subsidiaries to “silo” the divisions, then a holding company structure may isolate the activities of one division from another. Each separate corporation must follow corporate formalities and act independently.
We know that corporate structure can be very difficult to understand. For additional information on the transition from a C-Corporation to an S-Corporation, please watch the recording of our webinar.
If you would like more information about how to properly structure your trucking business, please contact Truck Writers today.