Corporation
The corporation is distinct from the shareholders, and the liability of the shareholders is limited to their investment in the corporation. Their personal assets are not at risk, except in certain specialized cases where the shareholders form a corporation to commit fraud, in which case, state law allows a "piercing of the corporate veil" to hold the shareholders accountable.
A corporation can have 1 or more stockholders. When the corporation has just 1 stockholder, that person must serve as the director and president, as well as secretary and treasurer. Shareholders who work in the corporation, as is often the case in closely held corporations, are treated as employees of the corporation under tax law — they are not self-employed.
Advantages
A “C” corporation can have several tax advantages over S corporations and unincorporated businesses:
(1) As a separate taxpayer, a “C” corporation can be used to split income between itself and its owner(s), with potentially lower overall tax rates as a result;
(2) A “C” corporation can deduct amounts paid for fringe benefits for its employee/owners, such as medical insurance or medical reimbursement plans, disability insurance, or group term life insurance;
(3) “C” corporations can elect a fiscal tax year; and
(4) “C” corporations are able to deduct up to 80% (70%, if the corporation receiving the dividend owns less than 20% of the distributing corporation) of the dividends that they receive from investments in other domestic corporations (§243(a)(1)).
Disadvantages
Disadvantages of a “C” corporation include:
(1) Required use of the accrual method of accounting (except in the case of certain personal service corporations);
(2) “C” corporations are subject to double taxation where income is paid out as dividends;
(3)“C” corporations with certain types of income, such as interest, dividends, rents and royalties, are potentially subject to the personal holding company tax on such income; and
(4) The difference between a “C” corporation’s adjusted current earnings and its taxable income is mostly (75%) a tax preference item for purposes of the alternative minimum tax.
The corporation is distinct from the shareholders, and the liability of the shareholders is limited to their investment in the corporation. Their personal assets are not at risk, except in certain specialized cases where the shareholders form a corporation to commit fraud, in which case, state law allows a "piercing of the corporate veil" to hold the shareholders accountable.
A corporation can have 1 or more stockholders. When the corporation has just 1 stockholder, that person must serve as the director and president, as well as secretary and treasurer. Shareholders who work in the corporation, as is often the case in closely held corporations, are treated as employees of the corporation under tax law — they are not self-employed.
Advantages
A “C” corporation can have several tax advantages over S corporations and unincorporated businesses:
(1) As a separate taxpayer, a “C” corporation can be used to split income between itself and its owner(s), with potentially lower overall tax rates as a result;
(2) A “C” corporation can deduct amounts paid for fringe benefits for its employee/owners, such as medical insurance or medical reimbursement plans, disability insurance, or group term life insurance;
(3) “C” corporations can elect a fiscal tax year; and
(4) “C” corporations are able to deduct up to 80% (70%, if the corporation receiving the dividend owns less than 20% of the distributing corporation) of the dividends that they receive from investments in other domestic corporations (§243(a)(1)).
Disadvantages
Disadvantages of a “C” corporation include:
(1) Required use of the accrual method of accounting (except in the case of certain personal service corporations);
(2) “C” corporations are subject to double taxation where income is paid out as dividends;
(3)“C” corporations with certain types of income, such as interest, dividends, rents and royalties, are potentially subject to the personal holding company tax on such income; and
(4) The difference between a “C” corporation’s adjusted current earnings and its taxable income is mostly (75%) a tax preference item for purposes of the alternative minimum tax.