Do you remember getting started in your brand new business venture? Besides testing the market, deciding on a product or service, there was this decision regarding entity selection. Before the early 1990′s, there was the corporation (C or S), the partnership in its many forms, and the sole proprietorship. With the advent of the Limited Liability Company or LLC, choosing an entity form has become more interesting and thought provoking.
The C corporation is a taxable entity in and of it self. The C corporation is a tax designation that simply segregates a regular corporation fro the subchapter S corporation. Owners of a C corporation will ultimately decide whether the entity will pay income tax or the ownership group will pay income tax as individuals. In the closely held business world, owners in the C corporation are also the management team which is very different from most publicly held businesses. It is not uncommon for the owners in a closely held C corporation to strip the earnings out of the business to avoid paying corporate level income tax. The C corporation is an entity that can produce double taxation in the sense that it is possible to leave earnings in the entity, subjecting them to tax, and then later distributing them to the ownerhsip group, or shareholders, to be taxed again. Careful management of this issue can serve to avoid double taxation. The C corporation is a great source for providing fringe benefits to the shareholders of the entity unlike the other entity forms. Careful consideration should be given to this point when making an entity selection decision. In addition, there can be many advantages for first starting a business as a C corporation entity, including code section 1202 stock. This code section allows for the exclusion of 50% of the proceeds from the sale of the company’s stock. However, this exclusion is subject to the alternative income tax (a later discussin for my faithful readers). An important characteristic of 1202 stock is that one can sell C corporation stock and invest in another C corporation’s stock with the proceeds, and avoid paying income taxes currently on the transaction. As noted, careful planning is essential.