There is one big reason why you may want to consider adding a C Corporation to your business structures sometime over the next few months. You might pay less in taxes.
The C Corporation has a graduated tax schedule, just like your personal tax schedule. You pay less tax on the beginning brackets then you do on the more advanced brackets. The highest personal bracket is 35%, but scheduled to go to 39.6%. The C Corporation highest bracket isn’t going up, in fact, there is a lot of talk that it might actually be going down.
Why? Well, if you’ve ever thought that taxes weren’t fair, you’re right. They aren’t. They are weighed heavily in favor of the guys who can pay the most for lobbying groups. When you hear about the big corporations getting all the tax breaks, it’s true. But there is one thing they forgot to tell you, little corporations get exactly the same tax breaks. The question isn’t big or small, the question is corporation or not corporation.
But before you jump in and get a C Corporation set up, there are some traps you need to avoid. And there are some tricks you need to know to get the most out of the structure. This week we’re going to look at some of the C Corporation tricks and traps you need to know to get the most out of your business structures.
To get a complete picture of what you can do, should do, and should never do with your C Corporation, please check out the complete Tricks and Traps of C Corporations now on sale at USTaxAid.
First, let’s look at what a C Corporation actually is.
A C Corporation is the most common type of structure used to operate businesses. Because C Corporations may be owned by an unlimited number of individuals (and other business entities), most public companies are C Corporations, as are most private companies with large numbers of shareholders.
A C Corporation is a protected structure that operates completely independently of its owners. A C Corporation files its own tax return and pays taxes at the business tax rate (which is based on its net income). Owners, who are also called shareholders, may receive some or all of the net profits, which are distributed by way of the C Corporation paying dividends. Because the business tax rate starts fairly low (15 percent on the first $50,000), C Corporations have long been favorite business choices.
C Corporations are two-level structures; a passive ownership level (the shareholders) and an active management level (the officers and directors). Shareholders are passive and protected by law from personal liability for the debts and actions of the C Corporation. They are liable only to the extent of their investment. In other words, you can only lose the amount you pay in for your shares.
Directors are elected by the shareholders, and are responsible for both electing and directing the officers, who carry out the day to day business of the corporation. Although powerful, directors are not permitted to involve themselves in active operations. For example, directors are not authorized to sign agreements and bind the corporation.
The officers are the people you most associate with corporations – i.e., the President, Vice-Presidents, CEOs, Treasurers, etc. Officers are the ones who carry out the daily business of the corporation. These are the people who will sign checks, enter into agreements, etc.
Officers and directors do not have to be shareholders of a corporation, although in many cases they are. Because there are no minimum numbers of owners, single-person corporations, where one person holds all of the offices, is a director and is also a shareholder is common. There is no requirement that everyone hold a position in a corporation. You could have a two-owner corporation where one owner is simply a shareholder and the other owner holds all the officer and director positions.
Corporations are typically governed by a blend of state law and an internal operating document, called the Bylaws. As long as there are no conflicting provisions between the Bylaws and state law, the Bylaws will be the primary source of information for how the corporation operates, i.e., how officers and directors are elected and removed, what powers the officers and directors have, when and how the corporation is required to pay out its profits (called dividends), when and how meetings of the shareholders and management may be called, and so on.
Corporations are formed by filing a document, typically called the Articles of Incorporation, at the Secretary of State level. They are required to maintain a registered agent in the state of formation (and any states they also do business in and are registered in) and in almost all states they must file a yearly report at the state level.
Okay, that’s the legal stuff. Best plan is to first make sure the C Corp is the best fit for you (with the advice of a smart CPA) and then hire someone to set it up for you. Check out this week’s special on USTaxAid for more information on the Tricks and Traps of C Corporations.