Personal Service Companies and C Corporations


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As we move into higher taxes, AMT, lost deductions and new surtaxes, there is one glimmer of hope for small business owners – the C Corporation.  Why? It’s really simple. All the bad tax changes coming with the Fiscal Cliff hit ONLY the individual income tax payer.  So if you have a small business taxes as an S Corporation, Partnership or Sole Proprietorship, you’re going to get hammered.

There are NO new taxes for C Corporations.

Plus, the C Corporation allows for a lot more in the way of tax free benefits for the shareholder/employee.

It’s one of the secrets that we talked about during our recent C Corporation webinar. You can listen to the webinar at http://www.CCorporationTax.com

There is one question that comes up again and again. What about personal service companies? If you provide personal or professional services in your company and meet the IRS definition of “personal service company”, the C Corporation might not be a good choice.

A personal service company that is taxed as a C Corporation cannot take advantage of the graduated tax rates and instead is subject to a flat tax. There is additionally a lower threshold for accumulated earnings penalty and you’re forced to use a calendar year end.

If you are in medical services, law, accounting, engineering, architecture or other professional consulting practice, you may not be able to use the C Corporation to your advantage.

The next two tests are how you and your employees spend your time and who owns the stock. If 95% or more of the total time is spent in the professional practice and 95% or more of the ownership will be held by professionals, then you probably should consider an S Corporation or LLC-S.  In some cases, you may have to use a PLLLP, PC or PLLC. This will depend on the state law in your home state.

If you fail either of these tests, then you are allowed to use a regular C Corporation.  Please listen to the free webinar replay at http://www.CCorporationTax.com



One Comment

  1. Steve Thompson says:

    Agree this is something to be acutely aware of. From what I understand, if you are a “professional consultant,” it may mean changing how your C corporation bills for services. For example, recruiting companies get paid a commission for placing individuals. As I’ve read the definition, being paid a commission or sales commission could remove the personal service corporation tag?

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