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C-Corporation |
Businesses who operate as a corporation enjoy a number of corporate benefits, including personal asset protection, the maximum allowable business deductions (including 100% of your medical bills), and the ability to amortize pre-existing and start-up expenses and depreciate business assets.
The price for these corporate perks is double taxation because a corporation is not a “flow-through” entity. Therefore, it is taxed as an individual entity. With a little tax planning, even the corporate tax bite can be minimized, making incorporation a very attractive entity for many traders.
How Incorporation Works
When you file articles of incorporation with your State, you create a separate legal entity that has the power to enter into contracts, buy and sell real estate, sue and be sued, and even commit a crime. Like any other individual, a corporation also pays its own taxes. Its shareholders (owners), board of directors (managers) and officers (who oversee day-to-day operations) are not responsible for corporate liabilities. Although they may be held liable at the personal or positional level in instances of fraud or when personal services are rendered.
In most states, you can legally form a one-person corporation in which you function as sole director and officers, or you may include family members or other parties. All corporations must meet the minimum requirements of incorporation (holding and recording minutes of annual meetings...maintaining separate books and records...issuing stock to shareholders) to preserve your personal asset protection.
A C-Corp designation refers to the standard, for-profit, state-formed entity as described above. All new corporations have 75 days to elect to become an S-Corp.
Unlike limited partnerships and LLCs, a corporation can continue indefinitely and its existence is unaffected by the death or incapacity of its shareholders, directors or officers, or by the transfer of its shares.
Advantages of a C-Corporation
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The corporation is a separate legal entity, and if it is adequately capitalized and proper corporate formalities are followed, the shareholders have liability protection from the debts and obligations of the corporation
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Corporations can utilize corporate benefit health plans, which often offer better retirement options and benefits than those offered by non-corporate plans
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100% deductible health insurance for all employees as well as group term life insurance up to a specified amount per employee
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If a stockholder dies or wishes to sell out, the corporation continues
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Easier to raise capital as a corporation than as a sole proprietorship or partnership
Can offer employee incentive stock plans -
There is no limit on the amount of capital or operating losses that a corporation may carry back or forward
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Income shifting: the ability to divide income between the corporation and the shareholders to minimize taxes.
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You may realize tax savings by leasing real property, a vehicle or even a domain name to your corporation.
Disadvantages of a C-Corporation
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"Double taxation." This means that besides paying corporate income taxes, any dividends to shareholders are taxed again at the applicable tax rate.
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Formalities and regulations must be followed very closely in conjunction with the laws regarding incorporating in a specific state. Failure to do so can create a situation where shareholders may be held liable.
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Costs more to start than a sole proprietorship or partnership
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More time and effort to maintain records because of all the governing laws
While the idea of double taxation is very troublesome to many new business owners, it is not usually significant for small businesses, where it is unlikely that there will be large dividend payouts. Rather, the money is paid out in the form of salaries and benefits. As the owner, you can pay yourself a reasonable salary and handle any number of duties in the corporation. By incorporating, you have the luxury of leaving some of the money in the corporation if you foresee significant personal income from other sources. This way you can reduce your own personal income tax payments.
Taking the time, making the effort and paying the additional expenses to incorporate are usually considered worthwhile by a business that foresees potential liabilities and/or seeks investors.
Final Word
I've briefly described the advantages and disadvantages of C-Corp status. All of the rules and regulations governing C-Corps, as well as recent decisions and current issues presently before the various courts today, would require a discussion of C-Corps beyond the scope of this article. The information contained in this article is presented to provide a general understanding of the benefits and cautions in selecting C-Corp status.
For more detailed information and specific advice for your business contact your local small business development center, your accountant or your attorney.