I talk a lot about business structures and there’s one big reason why I do: They protect assets and are an integral part of a tax-saving strategy. You have to use the right business structure, though, because the wrong one can cause a major problem.
One of the structures that is often misunderstood is a C Corporation. People seem to either love it too much or hate it too much. Let’s go through some of the basics.
A C Corporation has better benefit plans available for the owner/employee. You get more deductions if you own a C Corporation than if you own an S Corporation. And the second benefit, is that a C Corporation is the only entity that pays tax at its own rate. That means you can move income from your personal tax return to a C Corporation. There are other benefits as well, such as the ability to go public and a much lower tax rate if you sell the stock of the corporation.
There are also some situations where a C Corporation is not a good idea. If you have one of the type of professions that would be considered “a professional service company”, you’ll pay a higher tax rate. That would include accountants, medical professionals, architects, lawyers and other professionals. If you have only passive income, you’ll also get nailed with more tax.
If your business has a loss, the loss can’t be used against other income. In that case, an S Corporation is probably a better choice. If you have to take all of the income out of the company in order to meet living expenses, then the lower tax bracket isn’t going to help you.
And one more huge warning: Don’t ever put appreciating assets inside of a C Corporation.
If you’ve made it through all the warnings, and have a business that is profitable, that could work inside a C Corporation and you don’t need every penny of it to survive, then yes, a C Corporation will most likely mean less tax for you. As the personal tax rate goes up, C Corporation tax rates do not. If some of your income goes to the C Corporation instead of your personal, your personal tax rate goes down.
Is a C Corporation right for you? Perhaps. It all depends on your own personal tax situation.