Converting a company to C Corp
Many people choose to incorporate their company for a number of reasons. It’s a way to build some legal protection into your business, gain limited liability to protect personal assets from company liabilities like lawsuits or creditors, and it can also reduce a business’ taxes. In some cases, it can provide more flexibility for your business.
For federal income tax reasons, corporations are governed by the Internal Revenue Code and there are different structures to consider. The basic corporation is governed under Subchapter C of the Internal Revenue Code, and they are referred to as C corporations. S Corporations start out as C corporations but make a special tax election to income and deductions taxed ditrectly to shareholders. C corporations are separate entities that can sue and be sued. With regard to taxes, they are separate taxpayers that pay tax at special corporate tax rates that differ from those applicable to individuals.
Forming a C corporation
There are different types of business structures and almost all of the larger corporations with more than 100 shareholders and publicly traded companies are C corporations. Companies that consider going public, seeking venture capital, or taking on investors, are, in most cases, C corporations. Small businesses with a sole proprietor are not necessarily barred from becoming a C corporations, just as long as a business follows the structured rules regarding corporation, it is there to protect you.
Smaller businesses often choose to start off as a limited liability company (LLC) or an S corporation, because LLCs do not require mandatory meetings and there is less paperwork involved in this type of business structure. The LLC and S corporations are “pass-through” entities with regard to taxation, in other words, they are businesses that aren’t taxed. Their profits or losses are passed through to shareholders included on individual tax returns.
Many startups register as an LLC or S corporation first and file to become a C corporation at a later date. It is quite common in the early years of business, when businesses are losing money and as their losses flow through to owners, but as businesses become more profitable they switch to C corporation to protect some of the profits from taxes.
C Corporation Benefits
- The option to use a medical reimbursement plan. A corporation can deduct medical payment up to a fixed dollar amount determined by the corporation as shareholder-employees are provided with this benefit on a tax-free basis.
- The need for expansion capital. A business that needs substantial startup capital may turn to venture capitalists for help. Financiers want to provide money to help businesses organize as C corporations because there is more flexibility in making ownership arrangements.
- The desire to become public. If there is potential for growth and becoming a public company trading on the national exchange, it must be a C corporation.
- Tax-free fringe benefits. A Corporation has the ability to accumulate earnings for future expansion lower tax costs than other entities.
- There are few drawback to using the C corporation format, such as the potential for “double taxation” the requirement to file more paperwork, and due to the complicated corporate tax forms, a corporation may require an accountant due to federal tax filing deadlines.
- Gaining a clear understand of your options can seem overwhelming, especially if you’re just beginning. When making your choice of entity selection, whether your business is a startup or small business with a sole proprietor, allow DMV Vegas, to help you make the right choice.