Incorporating: S Corp. or C? See Your Fringe Benefits

An accountant offers insight into deciding which corporation status makes more sense for your company and why.

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If you're uncertain whether S- or C-corporation status makes the best sense for your company, don't overlook one important issue: your own fringe benefits. Put simply, the more of them you and your partners have (and the more valuable they are), the better off your company would be as a C corporation.

Valerie Robbins, a partner at accounting firm Beers & Cutler, based in Washington, D.C., explains, "At C corporations, the cost of fringe benefits is deductible by the corporation, but it's not considered taxable income to the employee. But at S corporations, the tax situation is more complicated."

There are two alternatives: S corporations can deduct their cost if fringe benefits are considered part of compensation, but then the owner-shareholders must pay taxes on higher income resulting from their inclusion. Alternatively, S corporations can skip the deduction (so that shareholders don't have to report it as taxable income). Either way, taxes are higher.

To see if the potential tax savings are worth a switch, consider the impact of all fringe benefits (including health, life, and disability insurance; company car; and so on). "Only qualified retirement plans," notes Robbins, "are treated the same way by both S's and C's."

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