Tax Benefits of A ‘C’ Corporation – Financing
If you are forming a corporation, you may be surprised to learn that a “C” corporation comes with many tax benefits. While this article is not meant to replace the advice of a good tax professional, it can serve to open your eyes to the value of a “C” corporation.
“C-Corporation
The “C” in the C corporation has some legal ramifications, but it is a primary designation for tax purposes. Put simply, the designation simply means that the corporation will act as its own tax entity. In contrast, an “S” corporation acts as a tax pass-through entity, pushing its finances onto the shareholder who reports the information on their personal tax returns.
The Internet Revenue Code lays down tax law and contains some juicy provisions for corporations. Let’s take a look at one of the advantages.
incorporating
When one party transfers something of value to another party, the IRS takes an interest. Consider the receipt of something of value as a taxable event. In simple terms, if you pay me to form a corporation, I have to file and pay taxes on the money. Since a C Corporation is a separate tax entity, what happens when you buy stock?
You have arranged to form a “C” corporation. Now you have to buy shares to become a shareholder. If you exchange money or property for the shares, the IRS takes the position that no taxable event occurred. In essence, this means that the corporation will not have to report your contribution as part of its income. If the money is not considered part of corporate income, no tax must be paid on it.
The exact rules for financing a corporation are a bit more complex. With any tax issue, you can expect there to be approximately fifty exceptions and qualifiers. For example, if you were to trade services instead of money for shares, the above example would not apply. Be sure to speak with a tax professional to handle your particular situation correctly.
In conclusion
Many people choose a business entity without considering all the relevant aspects. Taxes are definitely one of these aspects. Be sure to research them before making your decision.