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Advantages of a C Corporation

The new corporate tax rate translates to huge tax savings for C corps but there are many other reasons entrepreneurs are choosing this type of structure. It can be a vehicle for shifting income for tax purposes and includes numerous write-offs for business expenses. Here are some of the many tax advantages of C corps:

Corporate Tax Rate Reduced

The 2018 tax reform changes have made C corps more attractive than ever to small business owners. With a corporate tax rate of 21 percent, combined with a wide array of deductions and write-offs small businesses are presented with a huge opportunity for tax savings.

Tax Benefits for Business Owners

Profits don’t pass through the individual business owners so individuals do not need to fear inflating their income and getting bumped into a higher tax bracket. Profits stay in the company but are taxed at the new lower corporate tax rate.

Minimize Taxes by Shifting Income

Unlike LLCs and S corps, the fiscal year of a C corp does not need to coincide with the calendar year. So business owners can opt to pay taxes on bonuses in a different year and strategize on when to take losses in order to dramatically reduce tax bills. These companies can also take losses over multiple years.

Write-offs on Salaries and Bonuses

Instead of receiving dividends which can be taxed twice, shareholders can be paid as salaried employees and the corporation can fully deduct its share of payroll taxes. The company can also pay enough to employees that minimal income is left at the end of the year to pay taxes on.

Deduct Medical and Fringe Benefits

Medical reimbursement plans and premiums for health and disability insurance that employees receive tax-free are also eligible for significant tax write-offs for the company.

Disadvantages of a C Corporation

C corps are great options for many companies, but they don’t work for everyone. Legal red tape, government regulations, and double taxation have the potential to cause issues. Here are some things to consider before structuring your business as a C corp:

Double Taxation – Get Your Wallet Out

Paying taxes once is bad enough but C corps have to pay twice. First, they pay taxes on profits when corporate income is distrusted to shareholders. Then, when the shareholders receive a dividend, they pay again on their personal tax returns. So the corporation itself is not paying double tax but potential business owners can view it as being hit twice by the IRS. Structuring your business as an S corp avoids double taxation.

Bogged Down by Regulations

Forming a C corp involves some hassles and can become time-consuming because of the long list of legal requirements. To incorporate this way you need to have a board of directors and conduct regular shareholder meetings at certain intervals where the minutes must be recorded.

Fees and More Fees

There are a number of fees associated with forming a C corp for any company and on top of it, nonprofits are hit with another charge because they must apply for tax exemption status with the IRS. This all adds up to make incorporation as a C corp especially challenging for new businesses.