Is the C Corp Entity About to be the Darling of Small Businesses?

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The following information is based on the House version of the new tax plan. It has passed the House, but not the Senate.

There are a lot of things to consider before you move your business to a C Corporation. The C Corporation has more rules. It’s trickier to get money out of the corporation. You need to be careful of designations like personal service corporation and personal holding company, plus watch out for penalties on excess accumulated retained earnings.

Still, I recommend that type of business structure for a lot of my clients. It’s usually not used by itself, but instead with a two part business strategy. For example, under current law, let’s say you are at the highest tax rate with your business and are currently operating as an S Corporation or the popular LLC-S (LLC electing S Corp treatment). If we set up a second company, a C Corporation, to receive part of the profit by sidestreaming some of the income or to perform a task for the S Corp for which it’s paid, you have moved money from the S Corp to the C Corp.

If you move $50,000 from the S Corp and, thus, your personal return, to your C Corporation. You move it from a tax rate of 39.6% to 15%, for a saving of approximately $12,500. And that’s without putting any special C Corp benefits in place for you.

That’s now.

It worked for the first $50K – $100K of taxable income, but the brackets increased up to 35% tax in the C Corporation.

The new plan will drop that to 20%.

You still need to figure out how to flunk the personal service corporation test. (For ideas on that look back to previous blogs.)

You’ll also need to figure out how to take money out of the C Corporation without paying double tax, or even any tax for that matter.

That’s all part of the strategy part. If you realize your business needs more strategy, join us at the next coaching session. To get more information Click Here.

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