If you are starting a business in the new year, you may be considering filing as a C Corporation business formation.
What is a C Corporation? What makes this entity different from filing as a different entity formation, like a standard corporation? Let’s explore the role that C Corporations have as a business entity and the benefits of filing to incorporate as a C Corp.
What is a C Corporation?
A C Corporation is a legal structure where a business may tax its profits separately from its owners. The “C” in “C Corporation” stands for a subchapter of the IRS tax code that governs this entity’s federal taxation.
So, what does it mean when the profits of a business are taxed separately from the owners? Profits and earnings are taxed at a corporate level. Shareholders of the business receive dividends, which are taxed at a personal level. Dividends are distributed by the corporation and may not receive a tax deduction. According to the IRS, this creates a double tax. This is commonly known as double taxation: where income taxes are paid twice.
Some entrepreneurs seek out ways to avoid double taxation. Incorporating as a pass-through entity, like an S Corporation, helps avoid this. An S Corp elects for profits, losses, deductions, and credits to “pass-through” to shareholders. This allows entrepreneurs to avoid being taxed twice on corporate income.
Despite double taxation, however, do not write off forming a C Corp just yet! Incorporating as a C Corporation provides businesses with unique opportunities.
Benefits of C Corporations
One of the biggest differentiators of a C Corporation is that the entity is separate from its owners. While this separation does create a double tax, it also provides benefits to growing businesses. Some of these include the following:
- Much like corporations and LLCs, C Corporations also receive liability protection. Limited liability helps separate professional and personal assets. This ensures that unforeseen circumstances, like business debt and lawsuits, will not impact personal belongings including houses and cars.
- C Corps may raise investment capital. Being a separate entity gives C Corps the chance to create an initial public offering (IPO). This allows a business to go from a private company to a publicly traded company.
- There are tax write-offs available for C Corporations. Some of these include the ability to write off healthcare benefits as business expenses. C Corp shareholders that provide services as salaries employees may also write off salaries and bonuses.
- Incorporating as a C Corporation allows entrepreneurs to receive four tax considerations. These may lead to extra tax write-offs.
- A C Corporation may receive 401(k) business financing. This is a type of financing where the individual puts their retirement funds (Rollovers for Business Start-ups, or ROBS) towards their business with a C Corp entity. This may include starting a business or buying a franchise.
Fiscal Year Bonus
C Corporations may determine their fiscal year. This is an unusual benefit that is not typical of most business entities. LLCs and S Corporations, for example, use the calendar year to determine their fiscal year.
A C Corp receives more flexibility. The fiscal year of a C Corp doesn’t need to directly correspond with the calendar year. As a result, shareholders may shift income. This allows for carrying profits and losses backwards and forwards.
Shareholders may decide on which year they will pay taxes on bonuses. It may be this year, for example, or it could be next year. Either way, being able to determine a fiscal year is a unique benefit from incorporating as a C Corp — and may also reduce tax bills!
C Corporations and Tax Considerations
Forming a C Corporation includes four tax considerations. These four tax considerations may allow a C Corp to claim more tax deductions and benefit write-off than other entity formations.
- Pass through of gains. A gain is a profit. By incorporating as a C Corp, gains made by the business are taxed twice.
- Pass through of losses. Let’s say a shareholder plans to write off losses. They will not be able to do it as a C Corporation. This is because a C Corp is unable to pass losses through to shareholders. However, there is an exception to this rule. A C Corp, as mentioned above, is able to determine its fiscal year. This allows corporations to carry losses backwards or forwards. Tax benefits of losses may apply to future or past profits. Ultimately, this helps to reduce tax burdens of a profitable year and carry the loss to next year.
- Transfer of assets to the entity. New businesses often have assets. Some assets include buildings and land. These assets transfer to a C Corporation. In time, assets may increase in value. This allows assets to be worth more to the C Corp than they were at their initial purchase. If this is applicable to a C Corp, there may be a taxable event. Assets that were purchased for lower price that now have higher values may provide a gain of a certain sum to the original owner of the asset.
- Transfer of assets from the entity. What happens when a C Corp distributes assets to a shareholder? The corporation pays tax on any gain in value of that asset. What does this mean? If an asset is distributed to a shareholder by a C Corp, the asset’s recipient receives a taxable gain on the asset.
Ready to Form a C Corporation?
Our team of professionals are ready to assist small business owners with forming a C Corporation. Let us help you prepare the paperwork necessary to file a C Corporation. We can prep your articles of incorporation, employer identification number (EIN), and more.
Are you considering filing as a different entity formation, like an S Corp or LLC? We can assist you with these filings, too! Contact us at mycorporation.com or call us at 1-877-692-6772 to begin.