Corporate Structure : Is a C Corporation for Me?

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I used to think that C corporations were meant only for large successful companies. When I think of C Corps, I think of big names like Microsoft, Google and IBM and definitely not a small business. In reality, it’s pretty easy to become a c corporation.

Anyone can file for C corporation status, but typically small businesses shy away from C corps until they are solidly profitable. Because the C corporation is probably the most complicated corporate structure that you can possibly have, there are a lot of questions that you should ask yourself before you decide to become one.

Are You Ready For the Paperwork?

C corporations require the most paperwork of all of the corporate structures. There are complicated tax rules involved and legal and accounting costs as well. In short, a C corp is probably the most expensive way to go and you will inevitably require professional help to maintain it.

In addition to all of this, the state will probably charge you a yearly fee or percentage of the profits just to maintain corporation status. In California, corporations are charged 1.5% of the profits or 800 dollars a year (whichever is higher). You have to pay this whether you are profitable or not.

Do You Require Limited Liability?

There are many other corporate structures that provide limited liability, so limited liability is generally not your primary concern when choosing a C Corporation. Similar to an S corp or an LLC, a C corp will shield you from high business risks that can’t be sufficiently covered by insurance.

Is Your Business Profitable?

If your answer is a resounding yes, then this is where the C corporation advantages truly start to shine. Unlike S corporations or LLCs(check with your state), C corporations can leave profits within the business. Typically, these profits are taxed at substantially lower rates.

For example, the tax rate for the first $50000 profit of a C corp is only 15% as of 2007. Compare that to your individual income tax rate which can get as high as 35% and you’ll see that you can save a tremendous amount on your taxes.

Especially if the C corporation is entirely run by you or your family, you can leave most of your money within the business and make purchases using your corporation’s assets instead of your own.

This practice is called income splitting. Let’s say that your corporation made 100k in profit for the calendar year and your individual tax rate is 30%. Instead of paying 100k to yourself and getting hit with a 30k tax bill, you can leave 50K within your corporation which is only taxed at 15%.

Your individual tax bill goes down to only 15k and your corporation pays only 7.5K which nets you a savings of 7.5k in taxes!

The important thing to remember is that corporate losses in a C Corp can not be used to offset your personal income taxes. Because C Corps are considered a separate entity, corporate losses can only be used to offset corporate gains.

That is why a business that is losing money should look towards an S Corp instead. The general rule of thumb is that a business should be making at least 100k in profits to consider becoming a C Corp.

Do You Have More Than 75 Shareholders?

If you plan on obtaining outside funding or giving out stock options to employees, you pretty much have to become a C Corporation in order to do so.

Do You Want a Retirement and Medical Plan?

Two of the biggest C Corp benefits are retirement and medical plans all of which are tax deductible off your business income. If a 401k retirement plan or saving on your medical insurance is important to you, then a C Corp is the only way to go.

Do You Need to Have Easy Access to Business Funds?

Because a corporation is literally a separate entity in the eyes of the law, it can be somewhat of a hassle to take money out of the business. For example, if you wanted to buy a house and tap into your corporation, you would have to do some paperwork and pay yourself a dividend.

This dividend would then have to be declared on your individual income tax return as dividend income. All transactions that take place between you and your business must be clearly documented.

How Do I Form A C Corp?

Forming a C Corporation can be a confusing task. There are several different forms that you need to fill out and many rules associated with starting and running a C Corp. If you are thinking about forming a C Corp, I highly recommend having a third party do the paperwork for you.

For example is a company that specializes in small business formation for a very reasonable fee. Rather than have to trudge through all of the different forms and legalese, it’s far easier to have handle everything for you.

Plus, they’ll give you a free consult as well. Use coupon code: MWQHJ for 10% off!

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