Question:

For a sole proprieter, what is the advantage of setting up a c-corp vs. an s-corp?

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My father has owned a business for 20+ years and as he prepares to retire he has cash (500k) in the c-corps name. He paid 15% tax on the money when it came into the corp. If he withdraws the money, he'll pay 28% income tax. Seems kind of crazy to pay 43% tax, in total. He claims it is a good tax shelter, that the money gets to grow and he can then use the interest off investments as income. How is it a good idea if his tax will be 43% on anything he takes out of it? For instance, let's say he takes interest payments as income from the corporation's cash investments (bonds/CD's)? The interest payments come directly from the business' investments...so the 43% rule applies.

Can someone please explain why the c-corp was a good idea? I am lost.

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  1. The key point that your missing here is that a S-corp, while taking a lower tax percentage, takes that lower percentage each and every year whether or not the proprietor recives money from the corportion.  

    A C-corp on the other hand taxes you higher, but only when u take the money out.  Thus if like dad is doing, u leave the money in the corporation for sheltering and investment purposes, you can literally avoid years and years of income taxes that u would otherwise have to pay as a S-corp.

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