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Among the different ways of incorporating your business – C corporations, S corporations, and Limited Liability Corporations – there are practical reasons for choosing a given method, such as the number of shareholders or liability considerations. For many small business who are considering incorporating in Georgia, the tax advantage of the S corporation should not be overlooked.

Tax Advantages of S Corporations

As a LLC, LLP, partnership or sole proprietorship, you are subject to the 15.3% Self Employment/FICA tax on all of your net earnings. The S corporation, on the other hand, pays you a deductible salary (which is subject to FICA), and then the profits flow through your personal return via a Schedule K-1. This K-1 income allows for permanent deferral of the FICA tax. The S corporation allows small business owners to legally save taxes as long as they pay a fair and reasonable salary to themselves.
Please take a look at the following comparison. It shows the tax effects on a single year’s income for a LLC, LLP, partnership, or sole proprietor vs. a C corporation, and compares it to a subchapter S corporation. Due to the way C corporations are exposed to double taxation, the payments are spread out over two years, which is not the case for partnerships or S corporations.

	LLC, LLP, Partnership, Sole Proprietorship	C Corp.	S Corp.
Income	$180,000	$180,000	$180,000
Expenses	($100,000)	($100,000)	($100,000)
Gross Profit	$80,000	$80,000	$80,000
Salary to Owner	$0	($40,000)	($40,000)
Taxable Income	$80,000	$40,000	$40,000
Entity Tax	$0	$6,000	$0
First Year
FICA/SE (15.3%)	$12,240	$6,120	$6,120
Federal & State Income Tax (25%)	$20,000	$10,000	$10,000
Tax on K-1 Profits (25%)	$0	$0	$10,000
Total Tax	$32,240	$16,120 *	$26,120
Second Year
FICA/SE (15.3%)	$0	$5,202	$0
Federal & State Income Tax (25%)	$0	$8,500	$0
Total Tax	$0	$13,702 *	$0
2 Year Tax	$32,240	$35,822	$26,120

Difference between Proprietorship and S Corporation
$32,240 – $26,120 = $6,120
* 1st year is tax on W-2, 2nd year is tax on $34,000
($40,000 prior year taxable, less $6,000 paid during the first year)

Please note this representation is only an example. It is being used for demonstration purposes, it does not take into consideration exemptions, deductions, fling status or any other significant tax matters. Your situation may not yield the same results. Please contact a tax professional before making any financial decisions.