Is a C Corporation the best option for your business?
When starting a business, clients often ask what type of business structure is the best fit for their company. Although many companies operate as a sole proprietor, in many cases it would be in the best interest of the business owner to incorporate. This will protect the owner’s personal assets from lawsuits, debts, and other liabilities of the company. The two most common structures when incorporating are LLCs and C Corporations.
The biggest difference between the two types of structures is how they are taxed. LLCs (Limited Liability Companies) are taxed as “pass through” entities which mean all profits are reported on the owner or shareholders personal tax returns. This means that revenue and expenses are put on a Schedule C form and reported on the 1040 form. On the other hand, C Corporations are “double taxed” which means earnings are taxed at the corporate level on a 1120 form and any dividends or salaries are then taxed on the personal tax returns of the shareholders or business owners.
Pros of a C Corp
Even though many business owners believe that a C Corporation is not a good option because of the potential double tax hit, this business structure can actually lower the tax burden of the business. There are quite a few tax advantages that your company can only take advantage of as a C Corporation. Let’s discuss a few of those…
Tax burden minimized by tax rate.
A C Corporation’s taxes can be lowered by the tax rate of the profits of the business. The IRS taxes different levels of profits for a C Corp at different rates. In some cases those rates are much lower than the rates of your personal taxes. As an example, the first $50,000 of profit for a C Corp is taxed at 15 percent while the same amount is taxed at 28 percent on your personal taxes.
Writing off charitable contributions.
C Corps have the ability to write off contributions of up to 10 percent of the taxable income for the year to any eligible charity as a business expense. You also have the ability to carry over any amount over the 10 percent for the next five tax years as well.
Ability to carry over losses for multiple years.
An advantage of this business structure is that you can take huge capital and operating losses if you show those losses for a few years running. The IRS does not tend to scrutinize businesses as much for this when they are first starting out. This is very good for start up companies who take on substantial losses in their first few years. This let’s you carry these losses forward onto future years.
Starting out, it is very important to understand the different business structures and decide which would best for you at the time. As your business grows you might want to decide to change the structure. Many small businesses think that the C Corporation structure is a better fit for huge companies or a business that has been in operation for a long time, but there are many business deductions that your company can benefit from that can mitigate the stress and effect of things like the double taxation. While I discussed only a few tax advantages of choosing a C Corporation, you should consult with a tax professional in order to have a complete understanding of this. Considering the affect it can have on your taxes, it is worth both the paperwork and cost to hire a professional to ensure you have all you need.