Becoming a business owner is a big step for any entrepreneur. While you might feel overwhelmed (or even scared) at times, you are taking a chance—which is commendable and exciting. One of the more confusing aspects of running a business is figuring out taxation. How much should you pay in taxes? What type of company should you file as? How do you maximize your deductions to reduce your tax liabilities? This guide will discuss the differences between a pass-through entity, which pushes the tax burden on to the owners, and a C corporation. It will review the tax rates along with the benefits or drawbacks of each type of company. Use this guide to determine the best business model for your needs—both financially and professionally. What Is a Pass-Through Entity? A pass-through entity is an organization that doesn’t pay corporate income tax. Instead, the tax burden “passes through” the company and falls on the owners. Pass-through companies are incredibly common in the US, where more companies file as pass-through entities (and report more income) than standard corporations. Pass-through companies include sole proprietorships, partnerships, limited liability companies (LLCs), and S-corps. Think about an individual who operates a sole proprietorship or 2 people who have a partnership. By following the pass-through guidelines, the business isn’t taxed but rather the individual who runs it or the partners who operate the business. What Is a C Corporation? It’s hard to define a pass-through entity as “the opposite of a C-corp” without discussing what this type of business is. C corporations legally separate the assets of the owners and shareholders from the business entities. The business is then taxed on its earnings before it distributes the rest to shareholders in the form of dividends. These shareholders then pay income tax on the dividends they receive. C-corps are the most common type of corporation, exceeding both S-corps and LLCs. Owners and managers can come and go from the company and the organization will continue to exist. As the C-corp grows, however, it will need to file with the Securities and Exchange Commission (SEC) to ensure transparency and legality in how it pays owners, shareholders, and employees. What Is the Tax Rate for a Pass-Through Entity? There is no set tax rate for pass-through entities because the business is not responsible for any taxes. However, the owner or manager of the pass-through company will need to pay personal income tax on their earnings. For example, sole proprietors wouldn’t need to pay taxes for their businesses, but they would need to pay self-employment tax, which covers Social Security and Medicare for the federal government. This person might also have to pay state income tax (if the state requires it) on top of their federal tax rates. A sole proprietorship is a strong example of a pass-through entity because 76% of businesses that operate with pass-through status use solo entrepreneurs or freelancers. Of the remaining businesses, 11% are partnerships and 13% are S-corps. What Is the Tax Rate for C Corporations? The corporate tax rate is currently at 21% in the US, which was dropped from 35% in 2017 under the Tax Cuts and Jobs Act. According to the Tax Policy Center, corporate income tax accounted for 6.6% of the total federal revenue in 2019, a drop from 9% in 2017. C corporations account for $230.2 billion in annual income to the country on average. With a C-corp, shareholders have to pay a second round of taxes on the profits earned by a company. After the company pays the first round of taxes at the 21% corporate level, shareholders need to pay income tax on any dividends that are paid out. What you pay on a personal income level depends on how much you earned throughout the year. To learn more about what you could expect to pay as an individual, whether you are trying to calculate your pass-through tax rate or your corporate dividend taxes, review the set tax brackets for 2020. Taxes start at 10% for individuals who earned less than $9,875 and step upward to 37% for income at the highest amounts (more than $518,400). Make Taxes Easier With Clear Organization If you want to ensure you are taxed at a fair rate and avoid overpaying as a pass-through entity, consider using an app that can make filing easier. At Lendio, our tool is free for small business owners—including sole proprietors and partnerships. You can track your expenses (including deductible charges), easily manage invoices, and generally keep your books in order. When it is time to file your taxes, you will have everything you need at your fingertips. Try us out today and see how Lendio's software can help you. The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.