The main difference between a C Corporation and other business structures is that
a C Corporation files and pays corporate income taxes directly. This is because, C
Corporations are considered a separate entity from their shareholders, and must pay
taxes on income left over after business expenses.
There are a number of instances in which it is beneficial to become a C Corporation.
If you plan to keep profits and other chunks of cash in the bank to finance your
growth, repay debt, or make other capital expenditures, C Corporation status could
make sense. This is because C Corporations can take advantage of corporate
income tax rates, which are sometimes lower than personal tax rates. For profitable
companies, C Corporation status has the ability provide greater flexibility in terms of
planning and controlling federal income taxes. C Corporations also can deduct the
cost of certain fringe benefit packages.
If you form a C Corporation, be aware that you run the risk of being taxed twice on
your profits - once as a corporation, and a second time as an individual when you
dispense those profits as dividends or when you liquidate the corporation. This is
one of the major disadvantages of a C Corporation. Let's say, for example, your
company has profits of $100,000 for one year. First, the corporation will have to pay
tax on it. Then, if you parcel that money out to yourself or other owners, the IRS
may treat it as dividends and will tax you as an individual. If you wait until the next
year to take all or part of that money as salary, you will already have paid corporate
tax on it during the year it was profit, and will then pay tax as an individual when you
give it to yourself as salary.
Many tax and financial experts can come up with ways to plan for profits to avoid or
limit this type of double taxation. You should speak with your accountant or tax
advisor to come up with the most flexible program for your company.
Advantages
- Corporate liability for shareholders
- 100% deduction of certain benefit packages
- Greater flexibility for planning and controlling income taxes
Disadvantages
- Requires more paperwork and is more expensive than partnership or sole
proprietorship
- Possible "double taxation" on profits