One of the most important decisions you’ll have to make as a small business owner is choosing the right business entity for your company and your business goals. Your business entity determines your company’s structure — which will determine how you pay your taxes, run your business, the types of documents you’re required to file, and more.
When starting a business, figuring out which one of the several available options is right for you — from LLCs to S Corporations and C Corporations — can be overwhelming. While many small businesses start out as sole proprietorships or partnerships, business owners may choose to incorporate their businesses to protect personal assets from company liabilities, such as lawsuits and debt.
C Corporations (C Corps) have become increasingly popular among business owners since the 2018 tax reform changes. C Corps now offer small businesses more advantages, such as greater ownership flexibility and unique tax benefits.
Let’s look at some of the top tax benefits of C Corps — and how they compare to the different types of business entities when it comes to taxation.
Here are seven reasons why you might choose to register your business as a C Corp:
1. Minimizing Overall Tax Burden
The 2018 tax reform bill was a big win for C Corps. The new corporate tax rate of 21 percent can mean significant tax savings for all C Corps, especially if a business doesn’t regularly distribute dividends to owners.
If business owners only take a salary, then that amount is not taxed at the corporate rate — shifting the tax equation further in their favor. Not taking a dividend often makes sense for business owners that plan to reinvest the money into growing the business.
2. Carrying Profits and Losses
Whereas the fiscal year must coincide with the calendar year for LLCs and S corps, C corps enjoy more flexibility in determining their fiscal year. Thus, shareholders can shift income more easily, deciding what year to pay taxes on bonuses and when to take losses, which can substantially reduce tax bills.
3. Collecting Funds for Future Expansion at a Lower Tax Cost
The C corporation model allows shareholders to shift income readily and retain earnings within the company for future growth, usually at a lower cost than for pass-through entities. Since profits from S Corps appear on shareholders’ tax returns whether they have taken a distribution or not, owners can get bumped into higher tax brackets even though they plow profits back into the company.
4. Writing off Salaries and Bonuses
Shareholders of C corps can serve as salaried employees. While these salaries and bonuses fall subject to payroll taxes and Social Security and Medicare contributions, the corporation can fully deduct its share of payroll taxes. Moreover, the company can pay employees enough so that no taxable profits remain at the end of the fiscal year (within reason, of course; the IRS does check that the salaries correspond to the services that shareholders provide as employees). Shareholders frequently use this option rather than receive dividends, which would indeed be taxed twice.
5. Deducting 100% of Medical Premiums and Other Fringe Benefits
As long as the company makes fringe benefits equally available to all employees, not just shareholders, there are many hefty tax write-offs possible for a C corp that individual employees also receive tax free: medical reimbursement plans and premiums for health, long-term care and disability insurance. It’s a wash for S corporations; the shareholders deduct medical costs from gross income but have to declare these same fringe benefits as income.
6. Carrying Losses Over Multiple Years
Although a C Corp can take large capital and operating losses, all losses can be carried forward into the future to offset your net profit, which can significantly reduce the corporate tax — without ever expiring. C Corps have the flexibility of using this whenever they choose. Most entrepreneurs choose to carry losses when it’s most impactful as a business continues to grow, and those tax write-offs are needed the most!
It should also be noted that the IRS tends to only scrutinize businesses, especially new ones, if they show losses for several years running. With this in mind, C Corps can be especially beneficial for startups that plan to take substantial losses in the first year but wish to carry them forward to future years.
7. Encouraging Passive Investors
One much-lauded advantage of S Corps is the ability to pass losses through to individual tax returns. However, this only applies to partners who participate actively in the management of the corporation. Thus, passive investors tend to fare better tax-wise under C Corps.
The Bottom Line
Businesses of all sizes can benefit from a C Corp business structure — including small businesses. Smaller companies, especially startups, may significantly benefit from the many C Corp tax benefits and opportunities this business entity can offer.
Choosing a business entity isn’t an easy decision. As businesses grow and evolve, business owners may also need to change the structure.
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