C Corporation Tax Considerations
Converting a business into a C Corp can enable you to establish some financial and legal separation between you and your business. Although such conversion might involve a lot of paperwork and the possibility of double taxation. Do the benefits of a C Corp exceed the risks, and how crucial are C Corp income tax considerations?
A better way of building legal protection for your business is to incorporate. Business people choose incorporation to gain limited liability protection for personal assets from company liabilities such as creditors or lawsuits. Companies earning a lot of revenue can incorporate to reduce taxes, thereby, find it easier to seek venture capital and acquire more business flexibility.
The Internal Revenue Code governs corporations for federal income tax purposes. The C Corporation is a primary American type of company governed under Subchapter C of the IRC.C Corporations are separate entities from a legal standpoint and can sue and get sued. From a tax point of view, C Corp’s are separate taxpayers who pay tax at special corporate rates different from those applicable to individuals.
If you want to set up a C Corporation, whether by yourself or with another co- owner, ensure you follow the right legal and practical steps to make it a success. How is a C Corp formed?
Forming a C Corporation
Almost all big companies in the U.S having more than 100 shareholders are C Corporations. Also, all companies seeking venture capital, considering going public or taking on equity investors are C corporations. That does not imply that a sole proprietor or a small business cannot be allowed to become a C corporation.
A C Corp can consist of one person. The law permits that; a person can form a corporation for the purpose of limiting personal liability for debts, agreements and lawsuits.
Benefits of Using a C corporation format
The key benefits of incorporating a C corporation include the following:
- The opportunity to utilize a medical reimbursement plan: A C Corp can deduct all medical payments up to a particular fixed dollar amount that the corporation sets. The shareholders and employees enjoy this benefit tax-free.
- The intention to make the company public: A C Corp is suitable for creating potential to grow the business to higher levels; such as growing into a public company to attract financing.
- The need for venture capital: Businesses in need of start-up or expansion capital can turn to venture capitalists for assistance. Financiers offer money quickly to C corps since they are more flexible in making ownership arrangements.
- Tax considerations: Besides the tax-free benefits that shareholders and employees enjoy, C corporations can accumulate profits at a lower tax cost that other types of entities and to use such earnings for future expansion.
The drawbacks of using a C Corporation Format
Several reasons argue against forming a C corps as follows:
- Potential for double taxation: profits get taxed to a corporation, after distribution to shareholders as dividends, they get taxed again. Corporations cannot deduct dividend distributions; however, double taxation can be mitigated by some strategies. Consult with Quickpro Consulting services for professional advice on such strategies.
- The requirement to file more paperwork: It is mandatory for corporations, to hold shareholder and board meetings and note down accurate minutes of the same. In addition, a series of tax forms get filed with state, federal and local officials, including taxes, employee compensation and profit distribution.
- Filing Tax Forms: Corporation tax forms can be complicated and also corporations have to pay taxes by March 15; a month before individual federal tax filing deadline.
C Corp Income Tax Considerations
A C Corp for purposes of federal income tax purposes is a separate taxpayer. A Corp files a return (IRS form 1120) to report all its expenses and incomes. A different tax rate schedule exists for corporations, with rates ranging from 15% to 35%.
C corporation shareholders only pay tax when and to such extent that they receive corporate distributions. Such distributions include:
- Salary and bonuses: bonuses and salaries are taxed to employees and shareholders at their personal tax rates. All payments are subject to payroll taxes this includes Medicare taxes, FICA and Social Security, paid by both the shareholder-employee and the corporation. The corporation can deduct compensation and its share of payroll taxes.
- Dividends: Dividends get taxed to shareholders at a maximum rate of 15%; the rate can get increased in the future for higher income shareholders. The corporation gets exempted from payroll taxes, but cannot deduct dividend payments.
- Fringe benefits: Fringe benefits are tax-free to shareholders. Usually, such benefits must be availed to all employees in a nondiscriminatory manner, and not just to the shareholder-employee.
C corporations can also be levied state- level income taxes as applicable in the states in which they do their business. A minimum payment gets collected to conduct a business in a state (also called a franchise tax).
Every state has a tax authority that you can check to learn about sales, payroll and other taxes that apply to a corporate business. A corporation might be obligated to collect sales taxes on goods and services offered and turn over collections to the state. A corporation might also be required to report on collections of sales tax return. Certain cities require additional registration for their taxes as well.
When does a C Corporation make sense?
Business entities should consider the C Corp when they anticipate their profit to more likely derive from the sale of the business and not from periodic distributions of the business earnings. C Corp makes sense for companies intending to grow their businesses using venture capital or retained earnings.
Currently, a C Corp gets taxed federally at rates of:
- 15% on the first $50,000 of taxable income
- 25% of taxable income from$50, 001 to $ 75,000
- 34% from $75,001 to $10,000,0000
- 35% of income in excess of $10,000,000
C corporation stockholders do not include retained earnings in their adjusted tax basis of their shares for purposes of evaluating gains and losses on sales of their shares. Also, C Corps can grant ISOs and offer restricted stock awards, but such awards do not result in exit benefits without the recipient paying tax upon receiving the shares.
Quick Pro Consulting services
At Quickpro, we understand that many businesses fail to incorporate due to one reason or the other. We are here to make incorporation smooth for you and your business. We will offer you advice and guidance on incorporating and paying of taxes. If you wish to open a C Corp, we can assist you to organize your business right and advise on mitigation of double taxation. Contact us and have your business incorporation, and tax matters handled by professionals.