Q&A: S or C corporation?

Q: I hear that there are two types of professional corporations. What are the differences?

A: For federal tax purposes, and in some states, there are two types of corporations. The default type is a C corporation, in which income taxes are paid at the corporate level. If you've retained any profits in the corporation at the end of your corporate year, they will be taxed at a flat 35 percent, plus any state income tax. You may get hit with additional income taxes in a later year if you withdraw these profits. On the other hand, an S corporation passes its profits out to the owner to be taxed at the personal level, thus avoiding the double-tax issue of a C corporation. S corporations have become very popular with doctors during the past 10 years. You may elect to be an S corporation by filing a Form 2553 with the Internal Revenue Service.