As you may know, a C-Corporation is what most people generally think of as a corporation. The owners (called shareholders) are not generally liable for the debts of the corporation. The corporation is taxed as a separate entity under the Internal Revenue Code based on specific provisions applicable to C-Corporations, including special C-Corporation graduated tax rates.
The shareholders are again taxed only if the income of the C-Corporation is distributed to them in the form of dividends. This is referred to as the "double C-Corporation tax" and is sometimes the main disadvantage of the C-Corporation as a form of business enterprise for some small businesses. In addition, a C-Corporation is liable for the accumulated earnings tax that is designed to prevent a C-Corporation from avoiding the payment of dividends to shareholders.
The Accumulated Earnings Tax is an additional business tax that is paid by corporations who choose to retain accumulated earnings rather than pay out the earnings in the form of dividends to investors. As a tax on earnings that are to be diverted into settling outstanding debt or investing in some aspect of the company operation, accumulated earnings taxes are calculated in addition to the usual corporate income taxes that I have outlined below. It is important to remember that the amount of accumulated earnings may impact the total amount of income tax due in a given quarter.
The Tax Advantages of a C-Corporation:
1. C-Corporation Graduated Tax Rates: Click on this link to see the graduated tax rates.
NOTE: For any successful business, these tax rates may be significantly lower on income up to $100,000 than the individual tax rates imposed on the shareholder of an S-Corporation or LLC.
2. Fiscal Tax Year: A C-Corporation may adopt any tax year it elects, even if this year is different from the tax year of its shareholders. This allows flexibility with the accrual of income and the payment of owner's salaries and bonuses. An S-Corporation or LLC must generally adopt a calendar tax year.
3. Employee Fringe Benefits: Shareholders of an S-Corporation or members of an LLC who own more than 2% of the corporation's stock are not allowed tax-advantaged fringe benefits available to the employees of a C-Corporation. These benefits include accident and health plans, group-term life insurance, and employer provided meals and lodging.
A Note on Double Tax on C-Corporation Liquidation: If a C-Corporation sells its assets and liquidates, there is generally a tax at both the corporate and shareholder level. When it comes time to sell the company in the future, you can discuss ways to significantly reduce this and or eliminate them completely through proper exit planning.
One way a C corporation can lessen the impact of double taxation is by paying you (the shareholders) who are employed by the firm reasonable salaries and bonuses on a tax-deductible basis. I like to review your corporate and personal tax situation annually to determine an appropriate level of compensation.
I believe that in many instances, the optimum tax and legal solution is achieved by the use of multiple legal entities. For example, combining a C-Corporation operating entity that conducts the active day-to-day business of the company with an S-Corporation (or LLC) leasing and management company to hold the land and fixed assets of the business and is responsible for overall management.
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