When forming your business, your focus is on hiring, selling a product or service, marketing, operations, and a hundred more moving parts. Unfortunately, one area that too many CEOs and business owners spend too little time considering is how to structure their business. It IS important. Because choosing the WRONG way to set up your business could cost you in taxes, investing opportunities, and future growth.
New companies today can be set up in one of five different structures: a Partnership, Limited Liability Company (LLC), Sole Proprietorship, S Corporation (S corp) or C Corporation (C corp). Since partnerships, LLCs, and sole proprietorships are generally reserved for smaller businesses, we will be covering the two most common types of business configurations: C corps and S corps.
Both C Corporations and S Corporations Share Similarities
While C and S corps do have several differences, they also share common traits.
- First, both C and S corps provide limited liability protection for the business owners and shareholders. What this means is that the owners’ personal assets are protected from lawsuits and debt collection targeting the business.
- Second, both business structures require its owners to file tax returns showing business income and profits.
- Third, no matter if you structure your business as a c corp or s corp, the owners must adhere to today’s compliance standards.
What Is a C Corp and Why Is It Preferred Over an S Corp?
Named for its inclusion in subchapter “C” of the IRS code, a C corp designation is an independent legal entity, owned by its shareholders, that has unlimited growth potential. Typically, a C corp tends to be a large company while an S corp is usually a small business or even a sole proprietorship.
When you think of C corp, think growth. For entrepreneurs who envision a company with considerable growth potential, starting a C corp may be the best choice.
Tax and Growth Advantages of Forming a C Corp
As a business owner or CEO, you naturally want to form your business in an optimal way to maximize tax advantages, minimize your tax bill, and provide the greatest opportunities for growth.
As experienced accountants and tax planners, we’ve worked with hundreds of clients — many who formed their businesses as S corps and many who formed theirs as C corps. While both formations have their advantages, these are the pros that make forming a C corp a clear winner in our eyes.
- Unlimited Growth — Creating a C corp enables your business to grow through virtually unlimited stock sales. This benefit is essential for any company that wants to go public.
- Lower Corporate Tax Rate — C corporations pay a flat federal income tax rate on their profits. This rate can actually be lower than the top individual income tax rates.
- Reduce Tax Liability with Tax Credits — Forming a C corp makes your business eligible for federal and state tax credits, including the Research and Development tax credit, energy credits, and Work Opportunity Tax Credit.
- Deduct Employee Benefits — Another plus in forming a C corp is the ability to fully deduct the cost of employee benefits, such as health, life, and disability insurance premiums.
- Retained Earnings for Growth — Investing in the growth of your business? Pay a lower corporate tax on expansion and R&D to defer your personal-level taxation.
- Net Operating Loss Deductions — Forming your business as a C corp could help offset any business losses to reduce future tax liabilities.
- Wide Range of Deductible Expenses — C corps can deduct business expenses, advertising costs, travel expenses, charitable contributions, and accelerated depreciation of assets.
- Avoidance of Self-Employment Tax — While sole proprietors and some LLC members must pay self-employment tax, C corp shareholders generally do not pay self-employment tax on dividends received.
- Fiscal Year Flexibility — C corporations tend to have greater flexibility in choosing their preferred fiscal year to help aid in tax planning.
Let’s Have a Conversation About Which Business Formation Is Right For Your Business
Choosing whether to form your business as an LLC, S corp, or C corp is a bigger decision than you may realize. Because the decision you make could have a significant impact on your tax bill, your total deductions, as well as your business growth opportunities.
While we do find that most sizable businesses benefit by forming a C corp, we would love to meet with you personally to learn more about your business and your goals. Schedule a consultation with us today — Call us at 856-536-3800.
