Governed by the Internal Revenue Code for federal income tax purposes, all corporations, no matter their structure or type, should implement a sound tax strategy to help them better manage their obligations. But understanding what applies to you and your business, and what tax strategy to adopt for the type of business structure you’ve chosen, isn’t always easy.
If you own a business, atax and accounting professional can help guide you, but in the meantime, here are a few things you should know before selecting to register your business as a C-corporation, and if you do, why creating a robust tax strategy is so important:
Operating for profit meansan automaticC-Corporation classification
While there are some exceptions to the rule, in general, any corporation operating for profit will be classified as a C-Corporation for taxation purposes, unless the option of being treated as a flow-through, is selected. This is known as a S-Corporation, and this type of business structure isn’t subject to income taxation.
C-Corporations help protect your personal assets
Incorporating a business is an effective way to give your business more legal protection, and many business owners gain limited liability by doing so. Helping to protect your personal assets from any liabilities associated with the company, such as lawsuits or creditors, incorporation can also help a business reduce its taxes, particularly if it makes a lot of revenue. This makes seeking outside investment and venture capital somewhat easier, and can also give your business some much needed flexibility.
C-Corporations are any business with taxes that are kept separate from the business owner, unlike S-Corporations, which are not usually taxed separately. A lot of companies, irrespective of their size and industry, are treated as C-Corporations for federal income tax purposes. While C-Corporations and S-Corporations both benefit from limited liability, only C-Corporations are eligible for corporate income taxation.
C-Corporations gives you a lower tax rate
For the first $75,000 they make, C-Corporations enjoy a lower rate of tax than other corporation types, but without prior knowledge or understanding of this, most business owners wouldn’t know about this.
Engaging with an entity management firm before you even register your business and choose a structure, can help you make a more informed choice that will best suit your priorities and give you the most advantages when it comes to paying taxes.
Profits can be split with a C-Corporation
Helping to ensure that neither the business owner or the business itself pays a rate of tax that’s higher than it needs to be, C-Corporations are able to split their profits between the business owner(s) and the business itself. This reduces the corporations claim for income amount when filing taxes, while increasing the business owners money amount reported for tax purposes.
C-corporations offer fringe benefits
If a C-Corporation offers fringe benefits, it may qualify for tax deductions, provided the recipient shareholder is also an official business employee. This gives corporations the chance to benefits that might otherwise not have been financially viable.
Also, provided the C-Corporation isn’t being used for any personal services, it can use fiscal years for accounting, which for tax purposes, are split between two calendar years. What this essentially means is that by declaring them at the end of the fiscal year, some tax-inducing declarations may be postponed.
Working with a tax and accounting professional can firstly help you determine which business structure is best suited for your needs. Then, according to the particular tax requirements of your chosen entity, the CPA will formulate a series of strategies to help you minimize your taxes and maximize deductions.