Pasadena’s Best Financial Consultants, Figueroa & Co., Advise on C-Corp Formation

Struggling to decide whether to change your business type? Pasadena’s top financial consultants, Figueroa & Co., can provide timely, professional and personal advice. There are very few smaller businesses who decide to go through the formal procedures to become a C corporation. The majority decide to be S corporations or set themselves up as limited liability companies (LLCs). But there are some accounting experts who firmly believe that due to changes to be made to tax laws may mean that selecting a different type of business entity might be a useful move.

Tax Changes

Those of us who own S corporations pay income tax based on our proportion of business earnings. C corporations are classified as separate taxpayers who pay tax on any earnings using corporate tax rates. Furthermore, shareholders in these corporations only pay tax on wages and dividends that are derived from the corporation. While nothing yet has been finalized, there are some proposed tax modifications that may change the present favorable handling of owners of S corporation owners and other kinds of business owners, which may mean a shift to C status may be more beneficial.

Increases in Individual Income Tax Rates

S corporation shareholders, partners, sole proprietors and members who are in limited liability companies, are required to pay income tax on personal returns related to their business income share. The highest individual tax percentage is the same rate as the highest corporate tax percentage at 35%. Under the current Administration’s suggestions, the highest tax percentage for individuals would rise to 39.6% while the highest rate for corporations would stay at 35%. These differences represent almost a 5 percent tax spread. For any businesses whose profits are over $500,000, this spread has a significant meaning.

Corporate tax rate reductions

The U.S.A. boasts the greatest corporate tax rates across all developed nations and there have been some suggestions mooted that the highest rate should be lowered to 32% or less. This action would increase the spread that exists between individual and top corporate tax rates.

S corporation shareholders self-employed tax rules mean that they only have to pay Medicare and Social Security taxes on their salaries. There are some proposals that would use the self-employment tax related to Medicare and Social Security taxes to be applied to S corporation owners. This would practically mean they would owe self-employment tax on what has been their share of any corporate earnings. It wouldn’t matter if they have been passed on to them in salary form.

C Corporation Benefits

Whether any tax changes occur or not, there are some benefits that currently exist to make C corporations an appealing entity.

Any kind of shareholder is permitted, as opposed to S corporations which restrict their ownership to only 100 shareholders and they do not allow corporations, partnerships or foreigners. C corporations do not restrict these sorts of shareholders. Businesses which require debt financing or equity from private sectors that are operating as C corporations are given a greater range of options.

Health insurance coverage is tax free to owner-employees in C corporations. Shareholders in S corporations have to report this benefit as part of their income and then take away the premiums at a deduction which is above-the–line. Self-employed people, in effect, have to pay self-employment tax on these premiums as they are unable to deduct them as one of their business expenses.

The number of classes of stock is not an issue. In the case of S corporations they are only permitted to have 1 class of stock, but C corporations are permitted to have as many classes of stock as they wish.

If one’s business grows and the idea is to go public, it will be necessary to be a C corporation, as this entity is made use of by every publicly traded company.

Changing to a C corporation

There are 2 routes that an S corporation can use in order to change to a C corporation:

  • Do something that takes away eligibility for S status, which could be the transferring of shares to shareholder who is ineligible
  • Provide a statement of revoking S status to the IRS.

There is so much more to be learned about the pros and cons of different types of corporation entities that any one who thinks his business qualifies or is serious about changing to a C corporation should look beyond the contents of this skeleton explanation and contact the business expertise at Figueroa & Co. in Pasadena.

Figco does his best to offer the financial expertise you need to assist you and your business to expand, become a success and flourish. The aim is to service you and your business and help you make the best choice for your future business success. Don’t be fooled into believing you can go it alone and make the best business decisions there are people out there such as Figco who not only know more about business options but have already been through the growth spurt and are now flourishing and the business prides itself as an outstanding example of what business success is all about.

If you need clear and professional advice about whether your business would benefit from a change over to a C corporation, call Figueroa & Co. in Pasadena at 626-793-4322.