Advantages of a C corporation.

• Author: Starkman, Jay

In deciding which form of entity to use for a new small business venture, the potential benefits of a C corporation should be considered. A C corporation may have relative advantages and benefits over other entity forms.

The significant disadvantages of a C corporation are well known:

* Double taxation of appreciated assets on sale or dissolution;

* High corporate income tax rates on annual income in excess of $75,000; and

* Tax traps for accumulated earnings and personal holding companies.

However, there are also significant advantages, especially for non-personal service corporations (non-PSCs):

* Low tax rates on the first $75,000 of annual income for non-PSCs;

* Availability of a fiscal year for non-PSCs;

* Superior fringe benefits for owner-employees;

* Different audit potential than passthrough entities;

* Sec. 1202 reduced rate of capital gains taxation on the sale of qualified small business stock; and

* Sec. 1244 ordinary loss deduction for a failed small business C corporation.

Low tax rates: The C corporation is a niche choice for small business. It allows a non-PSC business to accumulate capital at low tax rates for funding accounts receivable, inventory, and fixed assets. In an S corporation, limited liability company (LLC), partnership, or proprietorship, capital is taxed at the individual's marginal tax rate, often with FICA liability. If the C corporation's taxable income can be managed so it does not exceed $75,000, it can achieve significant front-end tax savings, which can greatly reduce the cost of acquiring capital to use in a business.

Fiscal year: Non-PSCs are permitted to use a fiscal year. (PSCs can use a fiscal year with a Sec. 444 election, but there is no benefit to this complex procedure.) A fiscal year spans two calendar years, allowing an owner-employee some leeway to control the calendar year in which he or she will recognize salary income and when the C corporation will realize a deduction.

Fringe benefits: When most of the owners of a C corporation are also employees, a self-insured medical reimbursement plan under Sec. 105(b) is a viable option. It allows the C corporation to pay all medical expenses not reimbursed by insurance, including some over-the-counter medications (Rev. Rul. 2003-102).The corporation can also deduct disability insurance for owner-employees.

Audit potential and tax liability: The audit potential for C corporations and their owners is different than it is for other entities and their...