401k Business Financing C-Corp vs. S-Corp

C-Corp vs. S-Corp:

In terms of taxes the choice between a C-Corp and an S-Corp will really depend on your particular circumstances and ultimately what you make.  While some advisors will almost always recommend an LLC/S-Corp over a C-Corp there are certain advantages of a C-corporation generally – see for example, the advantage discussed in the following article: http://www.legalzoom.com/incorporation-guide/corporate-tax-advantage.html   As a general matter, those advisors will make such a recommendation because of the perception that C-Corporations are subject to a “double tax” (where the “double tax” refers to the fact that the corporation must pay tax on its income and any corporate profits distributed to the stockholders are subject to capital gains tax).   While this may be generally true, it is worth noting that with respect to our 401k business financing plan (i) any double taxation effect is mitigated by the fact that any dividends paid with respect to the stock held in your 401k will paid to your 401k on a tax-deferred basis; and (ii) any taxable income at the corporate level can be reduced by a reasonable salary paid to you as an employee of the corporation (since this would be an expense to the corporation).  Ultimately, if you want to use your retirement funds to finance the business the business must be organized as a C-corporation.  As such, perhaps a better comparison would be (i) the cost to access to your retirement funds, vs. (ii) the cost to obtain other types of financing vs. (iii) the taxes and penalties that you would owe if you simply withdrew the funds (often 40% of the distribution).  For example, consider the costs of our plan vs. a $100,000 loan with a 7 year term at an interest rate of 7%.  With our plan, our set-up fee and annual fee over 7 years will total $7,000 plus an additional estimated costs of $4000 for annual valuations and if needed premiums for a fidelity bond (estimated total: $11,000).  With the loan, you would pay over $26,000 in interest (see calculator at https://smallbusiness.yahoo.com/advisor/business-tools/loan-calculator).

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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