People have been using corporations for decades in order to limit the owner’s liability and allow them to take greater risks and to encourage investment. This is why people still do it up to this date.
You might be hearing about two kinds of corporations namely the C Corporations and S Corporations. The state of organization has granted these two kinds of corporations with charters. C Corporations are the most common type of corporation a lot of people go after, we are highly enthusiastic about the advantages C Corporations have to offer. They will surely be of great use to your entity.
The C and S are actually IRS Code Sections C Corporations feature double taxation, this means that one tax on the company level, another on the profits that are being distributed by the shareholders. This double tax is the main reason why a lot would go for S corps which contains a single level of tax. But the S Corporations however, have restrictions on ownership unlike the C Corporations which contain none.
Tax Advantage: Expenses and Deductions.
A C Corporation enjoys the benefit of having the widest range of expenses of deduction granted by the IRS. A C Corporation can easily set up various employee benefits such as medical reimbursements and etc., and be able to subtract the running costs of these programs, premiums and all. The owner or shareholder along with your employees will not be paying taxes on the value of the said benefits.
However, these benefits are not enjoyed by flow-through entities such as the S Corporation. In the case of these kinds of entities, they may be able to deduct the costs of the said benefits, but if an employee or a shareholder owns over 2% of the company will have to pay taxes based on the value of the benefits being received. So if you wish to have employee benefits that are tax free as well as enjoy a maximum amount of deductions then a C Corporation is possibly the entity for you.
Tax Disadvantage: Double Taxation Scenarios.
The blatant disadvantage that most people cite is the double taxation. Double taxation occurs when C-Corps plans to distribute extra profit left by the end of the year among its shareholders as dividend. The entity has already paid the taxes on the profit, but once the profit is to be distributed as dividend among the shareholders they will have to declare it as income, meaning they will be paying taxes again on their personal tax returns based on their personal rates.
Companies such as Corporate Direct offers consultation services that help you find out what type of corporation is best for you.If you want to learn more about what type of corporation is best for you, you can find more info here.