owners generally do not pay themselves large officer salaries, because of the w-2 tax rates which can be extremely high in a state like california. this also muddies up the discretionary compensation numbers when a potential buyer comes along and assesses the P&L on the company. this w-2 income is also taxed twice -- the state takes its cut with payroll taxes and unemployment/disability insurance. if you add sales tax into the mix, an owner is paying upwards of 50% taxes on this money if he decides to buy something nice -- not smart.
to get non-payroll money out of a c-corp and into the owners' pockets, it will be taxed twice, first as corporate income and then as dividend income on the individual owners' tax return. if you have a way around this that doesn't involve laundering money offshore or to shell companies, i'm all ears.
for a smaller, closely held private company with no institutional investors, an LLC taxed as a partnership or something similar (not an s-corp) will yield a lower effective tax rate for the owners of the company and more closely represent what actually is going on.
investors want to invest in a delaware c-corp usually because all of the laws and case precedence are favorable to them.
Why would you not recommend S-corp taxation (LLC taxes as S-corp) for this purpose? Doesn't that give you the best of both worlds (easy management with pass-through taxation)? There are obviously headaches over an LLC (have to keep books, corporate meetings, etc...), but I feel those are outweighed otherwise by the savings by taking at least part of your income as S-corp distribution vs wages.
You clearly feel differently, I'm just curious why.
the managerial overhead is not worth the difference (remember the professional fees required to run all this stuff). if my company made more revenue, i'd probably feel differently.
at the end of the day it comes down to how much revenue vs. overhead vs. capital structure you feel comfortable with.
We converted from filing as LLC to LLC filing as S a few years into the company, and it didn't really change much for us. Either way, when you get significant revenue, you need an accountant to do your taxes. I don't remember our costs going up significantly after we switched.
Note that although this is generally true, it is only useful advice if corporate income greatly excceds the sum of employee and officer salaries. The IRS frowns on officer salaries that are below market so you can not simply pay yourself a pittance in W-2 wages and give yourself a huge dividend. That's tax avoidance.
to get non-payroll money out of a c-corp and into the owners' pockets, it will be taxed twice, first as corporate income and then as dividend income on the individual owners' tax return. if you have a way around this that doesn't involve laundering money offshore or to shell companies, i'm all ears.
for a smaller, closely held private company with no institutional investors, an LLC taxed as a partnership or something similar (not an s-corp) will yield a lower effective tax rate for the owners of the company and more closely represent what actually is going on.
investors want to invest in a delaware c-corp usually because all of the laws and case precedence are favorable to them.