Tricks and Traps of C Corporations

Transcription

1 Coaching Program Tricks and Traps of C Corporations Why Everyone Needs a C Corp or an LLC-C (Eventually) There comes a point in every business owner or investor s life where a C Corporation becomes a good idea. Typically this is when your income has reached a point where you are solidly into the top federal (and state) tax brackets. With a current federal rate of 35 percent, and state rates that have, in some cases, increased to double digits, there comes a point where staying in an S Corporation (or an LLC-S) actually becomes counterproductive (for taxes). With careful tax planning you could reduce your taxes using a C Corporation, even with the double-taxation issue. The C Corporation can also be a good idea if you want better benefits to employee/owners than an S Corporation can give you (without paying extra tax). Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 1 of 23 This material is informational only. It is not meant, directly or indirectly, to provide formal legal and/or tax advice. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation. We take reasonable precautions in the preparation of all material presented and believe it is accurate as of the date it was written. However, we assume no responsibility for any errors or omissions, and we specifically disclaim any liability resulting from the use or application of the information contained herein.

2 10 Questions to Help Make the C versus S Corporation Decision Here are 10 things to think about before you make your decision: 1. Are you earning more than $ ,000 per year? 2. Will you need all of the income from the corporation to live? 3. Do you expect a lot of losses in the early years?? 4. Do you own any other C Corporations? 5. Where do your shareholders (and potential shareholders) live? 6. How many other people are going to be involved in this business? 7. Do you think your business may be suitable to take public at some point? 8. Do you have a lot of uncovered medical expenses? 9. Do you have a need for staggered fiscal year-ends? 10. Are you using the corporation to operate a licensed, professional business? What is the Double Taxation Issue? Double taxation is something unique to C Corporations. It happens because C Corporations are the only business structure that pays taxes at a separate, corporate income tax rate. The other structures don t pay separate income tax. Instead, they flow their net profits (before tax) through directly to their owners tax returns, where those net profits are then taxed at the owners individual tax rates. In flow-through entities, the business s profit is only taxed once. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 2 of 23

3 But in C Corporations, that profit is taxed twice. The first tax is calculated directly against the Corporation s net profits (before tax). The second taxation happens when you, as the owner, try to access those after-tax profits. When you pay out the profits as a dividend, you have to report the money on your personal tax return, where it is taxed again this time as the current tax on dividends. Double taxation isn t always a bad thing. There are times when it actually presents a really good strategic planning opportunity. But there are also times where it can lead to a higher than necessary tax bill. Are You Earning more than $350,000 Per Year? If your Form 1040 income is less than $350,000, including your anticipated income from this new business, then from a tax perspective you might not need a C Corporation. You can use the S Corporation to flow income through to yourself, in a combination of W-2 salary and profit distributions. You ll have income tax on both portions of the money, but you will only have payroll taxes on your W-2 income. Your profit distributions will flow through to you without additional payroll tax (at least right now). On the other hand, if your income, including the income from this new business exceeds $380,000, you ve moved into the top tax bracket. All income that falls into this bracket will be taxed at 35% federally. Now you might want to explore how the C Corporation tax structure could benefit you. C Corporations have their own tax brackets, which can be Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 3 of 23

4 lower than personal brackets. For example the first $50,000 in net income in a C Corporation is taxed at 15%. If you had that same profit in an S Corporation, it would come through to you as a profit distribution and be taxed at your personal rate, which could be as high as 35%. Do You Need All The Income to Live On? If you don t need every dollar of profit your company earns, you may be a great candidate for some advanced tax planning. What we re talking about here is a Retained Earnings Strategy. With this strategy, you take a salary to cover your financial needs, and leave the rest (or most of it) in the C Corporation. In the right circumstances, it s an easy way to save $12,500 (tax savings on $50,000 of income. But to make this strategy work, you need to be able to leave part of the C Corporation s income in the business, as retained earnings. C Corporations are the only entity that can choose whether or not to disburse the profits from the business. With S Corporations and the other flow-through structures, the IRS considers all the profit each year disbursed, and taxes you on it, even if you don t actually distribute the money. In a C Corporation, undisbursed profits are called retained earnings. C Corporations may retain up to $50,000 of after-tax profits each year with no tax consequences. (Once a C Corporation accumulates $250,000 in retained earnings it may become subject to an excess profits tax). Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 4 of 23

5 The great thing about retained earnings is your ability to divert that money into other business investments, real estate, loans, or a pension plan, for example. In each case, you can move the money from the C Corporation directly to the business venture. It never hits your personal return, and so there never is a capital gains tax issue for you. Say you wanted to use the excess profits to invest in a real estate venture. You could create a new LLC to hold the property, and then have the C Corporation make a loan to the LLC. Because the money went out of the C Corporation as a loan, it won t be considered a taxable dividend to you personally. Plus, as the LLC repays the C Corporation that money won t be considered taxable income to the C Corporation it s simply a loan being repaid. This can be an incredibly powerful strategy for smart investors! Do You Expect a Lot of Losses in the Early Years? Will your business lose money in the early days? There s a reason most businesses begin life as S Corporations. That s because C Corporations, unlike S Corporations, may not flow their losses through to the owners personally. Because the C Corporation pays tax at its own rate, it has to deal with the losses internally as well, and use them to offset its income. If the C Corporation has more losses than income, anything left over gets suspended, and carried forward until there is enough income to complete writing off the losses. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 5 of 23

6 In an S Corporation it s different. Losses flow through to your personal return, just the same way profits do. Now, if you ve got more losses than profit, the losses can be offset against your other income. This is something our high-earner clients love. The ability to take business losses against other active or passive income can really bring down their personal tax bills! The rule of thumb here is to first look at your current income level. If the business is your primary source of income and you are taking $50,000 or less out of the business, then an S Corporation is your choice. If you have multiple sources of income and are already in a high tax bracket and especially if you don t need all of the income from the corporation each year then the C Corporation may be worth looking at. Do You Own Any Other C Corporations? The controlled group is a gotcha that has snagged some of our clients! If you own a majority interest (50% or more) in two or more C Corporations, your corporations will be considered a controlled group by the IRS. When you (or a group of related persons) control multiple C Corporations a controlled group is created. For tax purposes, the C Corporations are all collapsed down into a single C Corporation. Now you have to add all of the individual business s income together, and pay tax on that consolidated income at C Corporation rates. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 6 of 23

7 Let s say you had three C Corporations, and planned them out carefully to have $50,000 in net taxable profits in each. You should be able to file 3 separate tax returns, and pay 15% income tax on each Corporation s net earnings. Right? Wrong. Under IRS controlled group rules, you would have to add all the income together, and then calculate your tax based on your new cumulative net income of $150,000. That s going to move you up the corporate tax bracket ladder to 39% on part of that income! And, in addition to treating the C Corporations as one entity for calculating tax, you must also aggregate certain deductions as well. So if you owned three C Corporations you d have to spread one Section 179 deduction across all three corporations. Instead of having a potential of $1.5 million in deductions for 2011 ($500,000 x 3), you're limited to a single $500,000 deduction. This amount will be lowered in future years, too, as the Section 179 expensing limits were temporarily inflated this year under Jobs Act of On January 1, 2012, if no additional changes are made, the total amount a business may deduct under Section 179 will be reduced to just $125,000 pear year. One bright spot in all of this concerns liability. While you might have to file a consolidated tax return for your multiple C Corporations, they are still treated as individuals legally. If one C Corporation is sued, that problem won t automatically flow through to impact your other companies. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 7 of 23

8 How to Avoid Controlled Group Status The best way to avoid controlled group status is not to have a controlled group. If you already own 50% or more of a C Corporation, then make sure you set up your other entities as S Corporations or LLC- S s. Because of their flow-through tax status, S Corporations and LLC-S s are not subject to the controlled group regulations. If you already have multiple C Corporations you may be able to get some relief by changing your ownership around. For example, if a couple has two C Corporations, we will often recommend that each spouse or partner own one Corporation outright, and have no ownership in the second one. Make sure you re following all of the attribution rules if you attempt this strategy. This is one thing you must get right and you will want an experienced tax professional in that arena. Where Are Your Shareholders If you have or are planning to have shareholders who live outside of the United States, then the only way to do this is to use a C Corporation. S Corporations are not permitted to have non-u.s. residents as owners. The reason comes back to taxes. Remember, in an S Corporation, the income flows through to the owners and is taxed there, at their personal rates. But if your owners don t live in the United States, that money could potentially flow out of the country without being taxed. That s not something the IRS wants to aid or encourage, hence the requirement that all shareholders be U.S. residents, and file a U.S. tax Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 8 of 23

9 return each year. Shareholders are also required to be natural persons or personally-owned trusts again, purely to prevent untaxed dollars from escaping the IRS. If you expect to have non-u.s. residents owning even a small piece of your corporation, the C Corporation is your best bet. An S Corporation that is found to have foreign owners will be unilaterally converted to a C Corporation by the IRS, and will undoubtedly involve some headaches, emergency tax planning, and most likely a larger tax bill. How Many Shareholders Will Your Business Have? Another S Corporation limitation is on the number of shareholders it may have. S Corporations are limited to 100 shareholders only. If you are looking to grow your corporation into a larger business, and, in particular if you are looking at taking it public or even carrying out private corporation financing (like a private placement offering), then you may be better served to use a C Corporation. While you can certainly begin as an S Corporation and change to C Corporation status later, there will be additional accounting and bookkeeping costs as you switch the corporation s records over to the new system. Will Your Business Grow and Become a Public Company? There is really only one way to go public, and that s through a C Corporation. Nothing else is flexible enough to give you access to the widest possible shareholder base while maintaining control over business operations. Remember, S Corporations are limited in both the number of Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 9 of 23

10 shareholders and their locations. C Corporations, on the other hand, can have a limitless number of shareholders, who may reside anywhere in the world. Another huge advantage C Corporations have over S Corporations is their ability to have multiple classes of stock, whereas S Corporations are limited to one type only. This can be enormously helpful when you are trying to design a structure that will let you stay in control as your business grows and more shares are issued. One common method is to issue preferred, non-voting stock to a corporation s founders, which can then be converted to voting stock when the corporation goes public. Now the founders can stay in control, even after several new million public shares have been added to the corporation s bank of issued shares (called a treasury). Medical Expenses and Medical Insurance If the ability to maximize loopholes and tax deductions is your overriding factor, then you should know that a C Corporation has more tax loopholes and deductions available to it than S Corporations, LLCs or LPs. On example is medical insurance. C Corporations can establish a medical insurance plan and write off all of the costs associated with that plan. So can S Corporations. But, there s a big difference in how those benefits are taxed. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 10 of 23

11 In both cases, the amount of the premiums paid by your corporation is a deductible business expense. But, if you own 2% or more of an S Corporation, and receive medical benefits through that Corporation, you are required to treat those paid premiums as a taxable benefit, and they are added to your yearly W-2. In a C Corporation, though, the premiums paid for your healthcare are not considered taxable income to you. Even the new healthcare legislation enacted in 2010 doesn t change that. So, while your insurance costs may be $1,200 per month for yourself and your family, you don t currently see an extra $14,400 reported on your W-2 each year. The C Corporation treats that $14,400 as a deductible expense part of its cost of doing business. One of the things that the current healthcare reform legislation did change, though, was a requirement that your employer show the amount of medical benefit you received on your W-2. That was supposed to start this year (meaning you d see it on your 2012 W-2), but the requirement has been pushed forward for another year. But, even though the amount will begin to show up on your W-2, it is NOT taxable income to you. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 11 of 23

12 So, if it s not taxable income, why are employers going to be reporting it on your W-2? That s a question we get all the time. There s no official answer, but most tax professionals believe it s there for two reasons: (a) To show the IRS that you have healthcare (remember, after 2014, you must purchase healthcare coverage or you will be fined; and (b) To ensure that you are not receiving Cadillac healthcare, which is defined as being above a certain limit ($10,200/year for individuals, $27,500 for families). Employees receiving paid healthcare benefits over this defined limit will have the excess value of their plans taxed at 40%. Medical Expense Reimbursement Plan The Medical Expense Reimbursement Plan (MERP) is commonly confused with a regular medical insurance plan, but it is actually so much more. With a MERP, you can spend a certain amount each year on medical expenses and then be reimbursed directly from your C Corporation for those expenses. The annual amount is set by your C Corporation. So, let s say you have a C Corporation where you and your spouse are the only employees. As long as you don t control any other companies that have employees, you can offer yourselves unlimited MERP. Every qualifying medical expense that you incur, expected or unexpected, can be reimbursed by Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 12 of 23

13 the C Corporation for a full deduction. And, with your own plan, what you define as qualifying can be considerably broader than would be available through commercially-available healthcare plans. The MERP is better than some of the other before-tax medical plans such as HSA, MSA, cafeteria or Section 125. With these other types of plans, you have an amount withheld from every paycheck. It is then held in a fund that you can get reimbursement from. There are two disadvantages to this program: (a) You have to determine a year in advance how much you want withheld. Unlike the MERP, there is no way to pay for an unexpected medical cost, and (b) You are limited by law to the amount that can be withheld each year. Right now those limits are $3,050 for individuals and $6,150 for families. However, the healthcare reform law changes that, and reduces those amounts to a flat $2,500, beginning in With a MERP though, reimbursement limits are set internally, by the C Corporation s Board of Directors. NEW FOR 2011: 2010 s healthcare reform legislation introduced a ban on using funds from your MERP, flexible spending accounts, health reimbursement arrangements or health savings accounts to cover the cost of over-thecounter medications. That ban started on January 1, Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 13 of 23

14 Staggered Fiscal Year-Ends Can Lead To Big Savings This is another great loophole C Corporations (and LLC-Cs) have that no other business entity does: the ability to select their own fiscal year end. All of the tax flow-through structures are stuck with the same fiscal year-end you are, being December 31st. The problem with all of your businesses closing their books on December 31st is you don t always have enough time to plan, particularly where you ve got multiple business streams of income that can either be inconsistent, or tend to pay off at different times. You could wind up either with a huge pile of money that artificially inflates your overall tax rate. Or, you could find that you ve done all of your year-end billings and have a big tax bill for money that isn t yet collected. Even worse, right at the exact time you may need your accountant or tax advisor s undivided attention such as how best to structure a windfall or shortfall they are buried under OPTR (other people s tax returns), and the answers you get are either late, incomplete or not properly thought through. By having a C Corporation in your business mix you can often alleviate some of the pain through layering of structures. A C Corporation could be paid a management fee, or a commission of some sort, which would allow you to pull windfall money out of the S Corporation and off your personal tax bill. By selecting a different year-end date for the C Corporation i.e., June 30th or August 31st (you can use a traditional calendar quarter or select a random month-end), you ve got a safety Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 14 of 23

15 valve for that money. It can stay in the C Corporation until the December 31st tax-time crunch has passed, and your CPA/Tax Strategist has the time they need to best help you to manage this income. Professional and Licensed Businesses Depending on the type of business that you have, the IRS can tag you with some additional designators, like professional, qualified personal service, and personal holding. Each of these designations will impact how your corporation is taxed, and can be an important factor on influencing when to use a C Corporation instead of an S Corporation, or vice-versa. Professional Corporations As a rule, the professional in Professional Corporations refers to a business where all of the owners hold the same professional license and offer a licensed service. Doctors, lawyers, accountants, and engineers are all examples of professions who operate in this fashion. Depending on your state, you may be able to use any of the three incorporated structures (C or S Corporation, LLC, or LP) as professional businesses. Professional structures are specifically designed for this purpose. Ownership in these structures is usually restricted only to those professionals who are properly licensed. For example, if you use a professional corporation to form a law firm, then each shareholder of the corporation would need to be a licensed attorney. However, there are a number of states that permit non-licensed parties or spouses to also hold stock or interests in a professional entity. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 15 of 23

16 The liability rules for these structures are also different. Generally speaking, professionals remain liable for their acts and deeds, no matter what type of business structure they operate through. If your attorney or CPA does something wrong and causes you to be sued or to lose money, you have a right of action against that attorney or CPA, as well as the firm he or she belongs to. Professional structures allow these individuals to work together as a group while having some personal liability protection from each other. In other words, if one doctor is sued for malpractice, it remains a personal suit against that doctor and against the medical practice. The other doctors cannot be personally named to the lawsuit. In many states, forming a professional corporation means you ll need the pre-approval of your state licensing board before your corporation s paperwork will be filed. In other states, you are required to first incorporate your business structure with the secretary of state s office, and then register it again with your local state licensing board. The best way to find out if you need to operate through a professional corporation is to contact your licensing board and ask them what their local requirements are. States are inconsistent on the list of professionals required to incorporate as a professional corporation. Generally speaking, if your profession requires you to be licensed and you need to belong to a state or federal regulatory body, you may need to operate through a professional corporation. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 16 of 23

17 Here are some of the most common occupations that must be operated through professional corporations. Again, contact your local licensing board if you have any questions about your own profession. Accountants Engineers Health care professionals, such as audiologists, dentists, nurses, opticians, optometrists, pharmacists, physical therapists, physicians, and speech pathologists Lawyers Psychologists Social workers Veterinarians Taxing a Professional Corporation Professional corporations can choose how they want to be taxed. Whether you use a corporation or an LLC, you can elect either C Corporation taxation or S corporation taxation. That classification does not matter to your state licensing board. But there are still some tax issues to consider, particularly if your business is also considered to be a qualified personal service corporation. Qualified Personal Service Corporation The IRS defines a qualified personal service corporation (sometimes called a QPS or a PSC) as a specific type of business where the owner/shareholder provides his or her own services for the corporation. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 17 of 23

18 The IRS considers most professional corporations to also be personal service corporations. In addition, though, the IRS has recently added actuaries, performing artists, and consulting companies businesses that generally aren t required to be professional corporations to the list. Operating a PSC as a C Corporation is something to be avoided, if possible. A qualified PSC is subject to a flat tax of 35% on its earnings, and has a lower threshold for accumulated earnings tax than a regular C Corporation. Instead of working your way through the graduated tax brackets you go right to 35% on every profit dollar, which will make for a significantly higher tax bill. Plus, a qualified PSC is also required to have a December 31st fiscal year-end, eliminating any tax-timing benefits normally available to C Corporations with staggered year-ends. If you think your business might be considered a qualified PSC, you have two options. You can: Operate as an S Corporation. The IRS considers the flow-through tax status of an S Corporation to offset the 35 percent rate it would normally levy; or Try to fail the IRS qualified PSC test. There are two ways to fail the test. One way is to show that less than 95 percent of all employees time is spent in PSC activities. For example, many veterinarians also offer animal boarding and care. As long as the veterinary practice can show that its employees are spending at least five Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 18 of 23

19 percent of their time caring for boarded pets, the practice can operate as a C Corporation without being tagged as a qualified PSC. Now the veterinary practice can enjoy all of the standard C Corporation benefits. We see this with optometrists too. Have you ever visited your eye specialist and been able to buy your glasses, frames and contact lenses on site as well? How about a chiropractor who also sells relaxation materials, a doctor s office that sells vitamin supplements, and so on? The same theory is at work here by offering services that are not PSC related, the owners can fail the personal service company test. The second way to fail the test is to make sure that at least five percent of the PSC S stock is held by persons who aren t personally providing the professional service. If you re lucky enough to be in a state that permits non-licensed spouses to also hold ownership in a professional corporation or professional LLC, this is easy make sure your spouse (or spouses, if there are multiple owners involved) own five percent or more. Personal Holding Company The personal holding company (PHC) is a corporation that has been established for the main purpose of collecting dividends, interest, and other solely passive investment income. It s defined as a C Corporation that is owned by 1 to 5 individuals, who together control 50 percent or more of its stock, and earns 60 percent or more of its earnings through passive income. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 19 of 23

20 The problem with being classified as a PHC is the increased taxes that go along with that classification. PHC s are taxed on their retained earnings on top of the regular corporate income taxes. The tax rate on those retained earnings is 35%. The best way to avoid PHC status is to use an LLC instead. LLCs are not subject to the retained earnings tax, and they give you better asset protection. 3 More C Corporation Tricks and Traps to Watch For Trap: Accumulated Earnings (or Retained Earnings) Tax When a C Corporation goes over the $50,000 per year ($250,000 accumulated) retained earnings cap set by the IRS that money becomes subject to something called the retained earnings tax. This is a tax the federal government set up to make sure that C Corporations distribute profits from time to time. The government s view goes something like this: 1. The more retained earnings a company has, the more attractive it becomes to investors. 2. The more attractive the investment, the longer an investor will want to hang onto it. 3. The longer an investment is static, the lower the tax revenue. Remember, the government doesn t get paid until the stock gets sold and the investor pays the tax on the selling price less the basis and selling costs. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 20 of 23

21 The government determined that by installing a tax on retained earnings, sooner or later, a C Corporation would rather put the onus on paying this tax onto its investors instead, and if the tax was high enough, even the largest investors wouldn t be able to persuade a C Corporation not to distribute its profits at some point. And once those profits were distributed, the government could collect capital gains tax from the investors. A great example of this is Microsoft. By 2004, Microsoft had retained earnings of approximately $60 billion and was paying dividends of around $0.16 per share each year. Investors were wondering if they would ever get some serious money out of the business, short of selling their shares. That year, Microsoft made a one-time dividend payout to its shareholders of about $32 billion, along with doubling its annual dividend rate to $0.32 per share. Why had Microsoft held out so long? There are many reasons, but one of the most commonly-cited ones was that Bill Gates had held up the dividend payout because of the impact it would have on his taxes. Because of his position as a major shareholder, Mr. Gates had the clout to persuade the directors to hold off on paying out distributions. When they were paid out, Bill Gates received some $3.6 billion and donated the entire amount to charity, offsetting the tax hit he would otherwise have faced on such a huge windfall. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 21 of 23

22 Trick: Using a C Corporation in a Low (or No) State-Tax State Earlier we outlined a tax strategy using a C Corporation and an S Corporation together. This strategy works great in states like Nevada and Wyoming, which have no state personal or corporate income tax. If you ve got a C Corporation with $50,000 or less in retained earnings, that money can sit in the Corporation s Nevada or Wyoming bank account without any additional taxes accruing. To make this strategy work, you ll first want to think it through with your tax advisor. You need to have a reason for using Nevada or Wyoming, and today that needs to be more than, I want to lower my taxes. Setting up a C Corporation in another state just for this purpose could run afoul of the new economic substance law, which was enacted as part of the healthcare reform legislation. Trap: Holding Appreciating Assets in a C Corporation In general you never want to have appreciating assets such as real estate held within a C Corporation. To demonstrate why, let s go through an example of holding property inside an LLC (limited liability company) versus a C Corporation. Let s say you and your partner buy a property for $600,000. Over time the property appreciates to $2,000,000 and you sell the property. In an LLC: You have gain of $1,400,000 that is split between you and your partner. The $700,000 each is taxed as long-term capital gains. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 22 of 23

23 Assuming you are paying at the top long-term capital gains rate of 20%, the tax per partner would be: $140,000. In a C Corporation: You have a gain of $1,400,000 that is taxed at the top C Corporate tax rate of 35%. The tax per partner would be: $245,000. But it doesn t stop there. All the money is still held within the C Corporation. How are you going to get it out? If you take it out as dividends, it ll be taxed again. The moral of the story is: Do NOT put appreciating assets inside a C Corporation. Should You Have a C Corporation? Hopefully, after you ve gone through all of this information you have the only right answer for the question: Should I have a C Corporation? And that answer is: IT DEPENDS! A C Corporation can be a wonderful tool, if it meets your needs. If it s not the right fit, it can be cumbersome and expensive to run. Copyright 2011, Smart Money, LLC and US TaxAid Series. All Rights Reserved Page 23 of 23