Legal Question in Tax Law in California

Re: tax advantage of prof corp?

if you use a c corporation, the distribution of your "profits" will be a dividend and so will NOT be deductible to your corporation and subject to double taxation (the corporation will pay corporate income tax on the dividend and you will pay personal income tax). if you use an s corporation and treat all of your "profits" as a distribution, your audit risk will be high. the irs will assert that you should have paid yourself "reasonable compensation" (subject to social security and medicare taxes).

SEE

http://www.irs.gov/businesses/small/article/0,,id=104468,00.html

there are other potential benefits of using a corporation - retirement plans, medical benefit plans, etc. a tax attorney or cpa experienced with formation options and issues can assist you further.

Re: tax advantage of prof corp?

I don't think it's realistic/defensible to allocate all of the remaining revenue to dividends and nothing to salary. However, some savings on SE tax can be achieved by allocating a less aggressive amount to dividends rather than reflecting it all as compensation.

Oh the other hand, operating a corporation implies additional expense & hassle with respect to filings with the Bar, the CA Secty of State, IRS, FTB, SSA, and CA EDD. You would need to set up a payroll reporting system to issue yourself regular paychecks and a W-2 from the corporation.