Advantages of C Corporations
When you are considering which legal entity to choose for your business, carefully consider the pros and cons of the corporation. A corporation is unlike any other form of doing business because it is considered by federal and state law to be an artificial legal entity that exists separately from the people who own, manage, control, and operate it.
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When you are considering which legal entity to choose for your business, carefully consider the pros and cons of the corporation. A corporation is unlike any other form of doing business because it is considered by federal and state law to be an artificial legal entity that exists separately from the people who own, manage, control, and operate it. It can make contracts and pay taxes, and it is liable for debts. Corporations exist only because state statutory laws allow them to be created. Here are some of the pros of starting a corporation.
- Limited personal liability
The main reason most businesses incorporate is to limit owner liability to the amount invested in the business. Generally, stockholders in a corporation are not personally liable for claims against the corporation and are, therefore, at risk only to the extent of their investment in the corporation. Likewise, the officers and directors of a corporation are not normally liable for the corporation’s debts, although, in some cases, an officer whose duty it is to withhold federal income tax from employees’ wages may be liable to the IRS if the taxes are not withheld and paid to the IRS as required. States have similar laws imposing personal liability on corporate officers for withheld state income taxes or for unpaid sales and use taxes.
- Income splitting
By using a corporation, you may be able to split your overall profit between 2 or more taxpayers so that none of the income gets taxed in the highest tax brackets. The total tax paid by the 2 taxpayers—you and your corporation—may be less than if all of the income were taxed to you, as in a sole proprietorship.
- Fringe benefit plan deductions
Federal and state tax laws permit you, as a corporate employer, to provide a number of different fringe benefits to shareholders/employees on a tax-favored basis. These tax-favored fringe benefits include medical insurance plans, self-insured medical reimbursement plans, disability insurance, death benefit plans, and (to a limited degree) group-term life insurance. In addition, a corporation—other than an S corporation—can generally deduct medical insurance premiums it makes on behalf of an employee who is an owner of the business, and the employee is not taxed on the value of the benefit provided. This is far more favorable than payments of salary to an employee, which are fully taxable.
- Tax break for dividends received by a corporation
C corporations can deduct at least 70 percent of the dividends they receive from stock investments from their federal taxable income.
- Tax break for investing in small business stock
The tax law provides major tax incentives for investing in the stock of certain small corporations. This incentive is not available for investments in unincorporated businesses or in stock of S corporations. A non-corporate investor who purchases “qualified small business stock” after August 10, 1993, and holds it for 5 years or more is allowed to exclude from his or her taxable income up to 50 percent of any capital gain reported on the sale of stock. The period in which the first company’s stock was held can be counted toward the 5-year holding period requirement if the second company’s stock is later sold for a gain.
- Continuous existence
Unlike a sole proprietorship or partnership, a corporation has continuous existence and does not terminate on the death of a stockholder or a change of ownership of some or all of its stock. Creditors, suppliers, and customers, therefore, often prefer to deal with an incorporated business because of this greater continuity. Naturally, a corporation can be terminated by mutual consent of the owners or even by one stockholder in some instances.
Source: Michael D. Jenkins, an attorney and CPA (www.roninsoft.com)— He is the author and principal editor of the million-selling state-specific book series, Starting and Operating a Business in the US. He is also the owner of Ronin Software and currently authors and publishes the Starting and Operating a Business book series as user-customizable electronic books, for each state. Contact him by email at email@example.com.