Now that 2018 extended returns for businesses are truly put to bed now, we can turn our gimlet eye on 2019.
And one thing that might be worth discussing is your operating entity.
A quick rundown on business structures is never bad, ESPECIALLY when tax laws change and affect Tri-State business owners’ personal tax situations so dramatically.
The three most common options are: C corporations, S corporations and Limited Liability Companies (LLC).
Each respective structure has its own tax advantages and drawbacks. If you have additional questions, following this article, please reach out and let me know. There is a potential heap of tax dollars you could save, especially if we haven’t taken a specific look at your situation.
Let me know if that’s the case, and I can assist you in the quest for saving cash.
Let’s take a look, though, today at the mighty C corp…
The Advantage a C Corporation Holds for Tri-State Businesses
“The essence of strategy is choosing what not to do.” -Michael Porter
From a taxation standpoint, a C corporation is viewed as a separate entity from the owner. To say it again: there is a separation between you and your business.
It’s important to hammer that home with all shareholders running a C corp because it means dual taxation — for the corporation itself and for the key shareholders.
Publicly traded and larger organizations will want to gravitate toward this structure of business. However, small business owners might consider C corp if they plan to reinvest earnings in the near- to long-term future. C corps receive a flat corporate income tax rate of 21%.
Now, things do get tricky for C corporations when they are sold to third parties because buyers would rather purchase accompanying assets as opposed to stock in the business. However, there are also significant advantages to selling as a C corp as well.
LLC & S Corp Scoop
These two entities are common when business owners don’t plan on expanding for the sake of future earnings that might attract institutional investors or a buyout. This is a reason many businesses form as an LLC or an S corp: they aren’t looking to attract such investors.
As far as tax ramifications go, S corps are usually not subject to income taxation as business income — with shareholders reporting gain/loss on their own personal income tax returns.
Note: An S corp can make the switch to C corp at any time, but a C corp must file and wait five years to become an S corp.
An LLC, on the other hand, is viewed as a partnership (for the sake of federal income tax). With an LLC, a business owner can avoid federal income tax (imposed on C corporations) and avoid various restrictions (imposed on S corporations).
The C Corporation Advantage
As mentioned, today I’m providing an emphasis on C corp advantages. We might dive into the other two entities at a later date.
But for now, it’s important that you know, with a C corp, you can:
- Operate within the context of a separate legal identity.
- As an owner, attain limited liability.
- Proceed with healthy separation between owners and managers.
- Open shareholding.
- Offer shares that are easy to access and transfer.
- Possess clout for the sake of venture capitalists and other investors.
- Present stock options.
- Take advantage of tax strategy opportunities.
I might be biased, but that last one sticks out to me as a C corp advantage. All three entities discussed possess their respective gains and setbacks, but highlighting tax advantages and strategies is why I get up in the morning.
Let me know if you want to look this over for YOUR business.
I’m grateful for our chance to serve you and your business — and we are dedicated to its success. Which means that we are willing to help you make the big change, if it’s advantageous…
Feel free to share this post with a business associate or client you know who could benefit from our assistance. While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.
Tri State CPAs