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Archive for the 'C Corporation Advice' Category

Choosing the Wrong Corporate Entity

June 11th, 2008

By The XBanker

Corporate entities come in three categories: the good, the bad, and the ugly. But even among the good, one size does not fit all. Choosing the wrong corporate entity can cost you time, money, and your personal assets.

The “bad” entity is the Sole Proprietorship, where the owner is personally liable for all claims against the business. If the business gets sued, as owner, you could lose more than just the company; you could lose your car, your house, everything. Though the paperwork required for a Sole Proprietorship is minimal and it is the cheapest entity to form, it is almost never worth the risk in today’s litigious society.

The “ugly” entity is the General Partnership, where each partner is responsible for the actions of the other. Any partner can obligate the partnership, even if one (or more) partner(s) protests a decision. And, as with a Sole Proprietorship, personal assets may be on the line. It is also important to understand that General Partnerships can be innocently formed. There is no filing requirement. A handshake or simple business arrangement – anytime you are sharing profits and splitting losses – could be seen by the courts as a General Partnership, regardless of the intent of the parties involved. Remember, with a General Partnership you have liabilities times two. You are responsible for your own mistakes as well as your partners’ mistakes. Not a good way to do business.

The “good” entities are the C Corporation, the S Corporation, the Limited Partnership (”LP”), and the Limited Liability Company (”LLC”). A corporation, LLC or LP is a separate legal entity with its own name, business purpose, and tax identity with the IRS. The corporation is responsible for the actions of the corporation, not individual owners or shareholders. As an owner or shareholder, your personal assets are protected. You are only liable for the money you put in to start the company, thus each corporation offers limited liability.

Simply filing as a corporation is not enough to protect personal assets, however. Certain corporate formalities must be followed (the same applies for LLCs and LPs) or a creditor will be able to claim that the business is a corporation in name only. In this case, the corporate veil may be pierced and personal assets claimed.

Choosing a corporate entity is a detailed, complicated process. Work with your XBanker account representative to properly set it all up. They will make sure you choose the right entity, thus avoiding a big mistake many business owners make.

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C Corporation Considerations

May 21st, 2008

By The XBanker

A C Corp has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corp can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits. This is not the case in a flow-through entity, such as an S Corp, LLC or LP. In each of those cases the entity may write off the costs of the benefits, but any employee/shareholder who owns more than 2% of the entity will pay taxes on the value of their benefits received. So, if having the maximum deductions and all of the employee fringe benefits on a tax-free basis is important to you, a C Corp may be your entity choice.

C corporations are great for a business that sells products, has a storefront and employees, and may or may not have a warehouse where it keeps its inventory. C Corps don’t work well with businesses that want to hold appreciating assets, such as real estate, because of the tax treatment on the sale of these assets.

The most often-cited disadvantage of using a C Corp is the “double-taxation” issue. Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates.

There are many things you can do to avoid the double-taxation scenario. Structure the C Corp so that there are no profits left over — use all of the write-offs and deductions allowed by the IRS to reduce the C Corp’s net income. Offer great benefit plans! Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway. And it may be that in the big picture, the savings on one side outweigh the additional taxes paid on the other side.

The decision as to what entity is best for you really does, in so many cases, hinge on taxes, and that is why, with any corporate-related decision, you are wise to seek the advice and assistance of a good CPA.

Some quick things to note on C Corps:

• They can have an unlimited amount of shareholders, from anywhere in the world.
• For Nevada and Wyoming corporations, officers and directors can reside anywhere in the world;
• They can have several different classes of shares.
• They are the most widely recognized business entity in the world, and are the premier entity for going public.

In Nevada and Wyoming, nominee, or stand-in, officers and directors can be utilized, adding extra levels of privacy.

While we like and often use S Corporations, we keenly appreciate that C Corporations have their merit and place in your entity structure strategy.

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