When to Use the C-Corporation

Hi, Mark Kohler here with another two minute tax and legal tip. Now I'm going to try to keep this to two minutes but it's a big topic. The C Corporation. When do we use the C Corporation? They're sold to us all the time on radio ads and TV ads and apparently they're the next best thing to slice bread because all the Fortune 500 companies have one and you should too. Well, what's the truth? Now the first benefit of a C corporation is basic and you all know it. It's asset protection. I get the benefit of the corporate veil as it's called. And if you are acting responsibly as a business owner, you are protected. If anything goes wrong in the business pachink, you are protected. And I've got other videos on my YouTube channel as to how to protect the corporate veil. Watch them. Now an important point here is the C Corporation corporate veil is the same as an S corporation, an llc. If anything goes wrong in the business, you're protected. That's the point. So don't think the C Corp has any better protection than any one of those entities. But it is a benefit of incorporating. The second main benefit of a C Corporation and why you hear ads that all the Fortune 500 companies are C Corporation is because they can have multiple shareholders, thousands of shareholders. They can raise capital by getting shareholders to give the corporation money. And by giving the corporation money, the corporation can expand and go public or get big and deliver their product or service nationwide or worldwide. That's why these big companies are C corporations. But it may not be the best for you as a small business owner. Now the biggest con to a corporation and drawback is double taxation and we've got to get it out there on the table. And these big corporations that want to have thousands of shareholders to raise capital, they know they've got to pay corporate tax, they're okay with it. But for us small business owners, this may not be the best fit because let's say we bring in $100,000 and we spend $25,000 on expenses, valid expenses and we write this all off and we net $75,000. Well corporate taxes now kick in if we want to take any money out. And so gosh, if I got to pay 15 to 30% or more of corporate tax, that doesn't make any sense. And so these wild and crazy planners will say oh well, you can just take more salary and you can zero out the corporation. Well if I take 75 grand a salary now I'm paying too much in FICA tax and I don't want to do that. Oh. So what they're going to do is say, oh, you get more write offs with a C Corporation you can write off extra fringe benefits. Oh, really? $75,000 worth? I don't think so. In my book, what your CPA is telling you and my tax illegal playbook, I break down the real numbers as to what you could write off in a C corporation and you're nowhere near going to be $75,000. So I'm still stuck trying to get this money out. How much do I take in a W2? Oh, that's right. They're going to say you can loan yourself the money and take out a loan to shareholder and then you don't pay the corporate tax. So you take part in a W2, maybe 25 grand and then you take part in a loan. But all you're doing is in delaying the inevitable because someday you're going to have to pay this corporate tax on this loan. When you shut down the corporation, the IRS is going to say, we want all that money paid back and attributed to you as a dividend. So we got. You got to pay corporate tax on this all the time. In our accounting firm around the country we have people coming to us going, I got sold the C Corporation and I've got this loan to shareholder. How do I get rid of it? You pay tax on it. Well, I don't want to pay tax on it. Well, then you take a salary. Well, I don't want to take a big salary and pay tax. You're stuck. And the C corporation is this vicious cycle. Be so careful. Watch my video on S corporations and how you can avoid the corporate tax and do a salary dividend split and avoid the loan process as well. For a small business owner, the S corporation makes so much better sense. Now let me give you a little tip of where the C corporation may play in in a limited circumstance when it comes to healthcare. Okay? Now I want to be honest and tell you where sometimes we use a C corporation and our accounting firm. Nine times out of 10, we're going to be over here setting up our S corporation and then using LLCs for our holdings. And we've got real estate over here and we've got a firewall and our operations over here. We've got sales come in, we take a W2, we take the rest as a K1 or you could call it a dividend, but there's no corporate tax. Now in this situation where the S corporation is Your primary entity, which I love. The problem is, is you still have a couple fringe benefits that are hard to write off in an S corporation. And this is where the C corporation gets oversold. Now if you've got health care expenses would say over $5,000 a year and I'm not talking about health insurance, I'm talking about out of pocket copays, deductibles and all sorts of other expenses. How are you going to write those off in an S corporation? It's very difficult. Now if you're married, I can use an HRA plan and backdoor it in through a spouse and then you can have this HRA through a spouse salary scenario. You can read this in my book and I've got other videos on that. But I've got if I'm not married and I'm single and I've got a lot of medical, my only other option is to do an hsa. So if I do a health savings account and fund it and then take the money right back out, that's cool. I got a write off for my health care. But maybe I want to build that hsa. So where the C Corp comes in and I love this strategy is if you're single and you have more than $5,000 a year in medical expenses, that's when it usually makes sense. We'll set up a C Corp with a medical benefit plan and a W2HRA for you, the shareholder. So in your S corporation you don't take a salary anymore, you lease yourself from a C Corp and this is where you take your W2. So it's kind of the C Corp health reimbursement arrangement strategy. And I only use it for my clients that are single and have more than $5,000 in medical costs. That, my friends, is the only other time I like the C Corporation. Now I know that was longer than 2 minutes and C corporations are a complex topic, but hopefully I summarized the reasons why these Fortune 500 companies use C corporations and why you as a small business owner don't want to deal with double taxation and loans to shareholders. Stay away from that. Now if you're in a limited situation and single with a lot of medical expenses, we might want to talk about the C Corporation. But be careful. And if anybody is selling you on a C Corporation, get a second opinion and find out if they're the ones that are going to be doing your tax return year after year and look you in the eye when you ask them. How am I going to close down the C corporation and avoid double tax. The C Corporation is a very unique structure and you've got to make sure it fits your situation and be careful out there. It's a jungle. Thanks for watching and if you love that video, I've got a lot more. Please subscribe to my channel and I shoot weekly videos that can help you in your business, personal life and better live your American dream. Also check out my newsletter free newsletter every week with blog articles, tips, strategies, tax deadlines. You'd love it. Also if you like social media, please follow me on social media with some daily tips and if you like to connect that way, it could be a lot of fun. But finally, please check out my tax and legal Library. I have 50 plus videos on these topics and more where I pull out a whiteboard and break them down. Hours and hours of helpful information that can better help you live the American dream. Sam.