A C corporation or C corp is the most common type of corporation in the U.S. There are some reasons it’s often preferred among businesses. First, the C corp offers no cap on growth potential with the sale of stocks. That means this structure is good for attracting investors with plenty of money to put into a business.
According to Anderson Advisors, a few other benefits include the fact that a C corp has limited liability and can continue existing even if the owner leaves the organization. C corps improve credibility and the appearance of professionalism, and there are tax advantages.
With the passing of the Tax Reform Act at the end of 2017, those tax advantages became even more appealing.
The following are some things to know about C corps as it stands now in 2018.
Corporate Tax Rate Cut
Prior to the new tax reform legislation, the maximum corporate tax rate was 35 percent. Now, going forward for corporations it’s just 21 percent, representing a significant drop. As a result, many small businesses are considering restructuring to take advantage.
Small Businesses and the Corporate Tax Rate
So why are small businesses considering going through a legal restructuring? Most don’t qualify for the slashed corporate tax rate right now.
Many small businesses are structured as pass-through entities. This can include LLCs and S corporations. The profits are taxed based on the owner’s personal tax rate. The new legislation does offer some new benefits for pass-through entities, such as the ability to temporarily deduct up to 20 percent of income, but these changes aren’t permanent.
To get the full, permanent tax advantages, businesses would have to reorganize as a C corp.
Is It Worth It?
A lot of professionals do believe it can be worth it for small businesses to restructure as C Corps. Some accounting firms and tax professionals are even recommending that their clients do it.
A lot of businesses worry about the hassle or headache it could create, but depending on the status of a business it could take less than a week in some cases.
With that being said, some things can pop up and create timing setbacks. For example, you have to create corporate bylaws and elect a corporate board of officers and directors. As a result, you’ll also have to commit to holding yearly board meetings, and you’ll be responsible for issuing stock certificates.
How to Convert Your Business
If you’ve weighed the pros and cons and decided new tax regulations have made it worth it to become a C corp, you have to think about the financial investment it will require.
For example, you’re probably going to have to work with accounts and lawyers, so be sure that you’re prepared to pay for those services.
Finally, if you’re paying consultant fees that are more expensive than what you’re going to save on taxes, it’s obviously not the best decision for you. For some businesses, the tax savings could only amount to a few thousand dollars, so do the math first.