If you are going to form a corporation, you might be surprised
to learn a ?C? corporation comes with a lot of tax benefits.
While this article isn?t intended to replace the advice of a
good tax professional, it may serve to open your eyes to the
value of a ?C? corporation.
?C? Corporation
The ?C? in C corporation has a few legal ramifications, but it
is primary a designation for tax purposes. Put in layman?s
terms, the designation simply means the corporation will act as
its own tax entity. In contrast, an ?S? corporation acts as a
pass through tax entity, pushing its financials down to the
shareholder who report the information on their personal tax
returns.
The Internet Revenue Code sets out the law on tax and it
contains a few juicy provisions for corporations. Lets take a
look at one of the advantages.
Incorporating
When a party transfers something of value to another party, the
IRS gets interested. It views the receipt of something of value
as a taxable event. In simply terms, if you pay me for forming a
corporation, I have to report and pay taxes on the money. Since
a C Corporation is a stand alone tax entity, what happens when
you purchase stock?
You have made arrangements to form a ?C? corporation. Now you
have to buy stock in it to become a shareholder. If you exchange
money or property for the shares, the IRS takes the position no
taxable event occurred. In essence, this means the corporation
will not have to report you contribution as part of its
revenues. If the money isn?t considered a part of the corporate
revenues, no tax must be paid on it.
The exact rules for funding a corporation are a bit more
complex. With any tax issue, you can expect there to be roughly
fifty exceptions and qualifiers. For instance, if you were to
exchange services instead of money for the stock, the above
example would not apply. Make sure you speak with a tax
professional to handle your particular situation correctly.
In Closing
Many people choose a business entity without considering all
relevant aspects. Taxes definitely constitute one of these
aspects. Make sure you look into them prior to making your
decision.
About the author:
Richard Chapo is with SanDiegoBusinessLaw
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