Essentially, a C Corporation is a legal structure where the owners, or shareholders, are taxed separately from the entity itself. However, “C Corps” are also taxed at the corporate level. Since it’s taxed at both the corporate and personal level, it’s considered double taxation. The benefit is that the each owners’ or shareholders’ assets and income are separate from that of the corporation.
The C Corporation will then pay taxes on earnings before distributing everything leftover to its shareholders in the form of dividends. Shareholders will then be taxed personally on those dividends they receive. If you are getting taxed twice, why use a C Corporation? Basically, the corporate tax rate is very favorable for reinvesting into the company. Currently, that tax rate stands at 21% for 2020. This is much lower than personal tax rates, which can go as high as 37%.
Forming a C Corporation
If you wish to form your own C Corporation for your business, you must first choose and register a business name. Obviously, you must choose a unique name that no one else has registered. Next, you will need to file the articles of incorporation in your state. Now the C corp will sell stocks to the shareholders, who will become owners of the corporation upon buying them. Lastly, you will need to get an employer identification number, or EIN.
Once established, a board of directors must be appointed. This group will oversee the management of the entire corporation. There must be an annual meeting of shareholders where minutes must be kept. This helps maintain transparency of all business dealings.
The main benefit of a C Corporation is that is that it limits the liability of all owners, shareholders, employees, etc. The business’s liability cannot be passed on to any individuals of the corporation. Further, the corporation can continue to run, even as owners changed and management is replaced.
A C Corp can have as few or as many shareholders as it so chooses. Keep in mind that there are certain thresholds where you must register with the SEC. The more shareholders, the more capital the business can generate. This is because you can continue to offer stocks in the company to attract more investors to help fund and grow the business.
C CORP and ROBS
Where does the C Corp fit in with IRA Financial’s services? ROBS – the Rollover Business Startup Solution! ROBS allows one to use retirement funds to start or grow his or her own business. If you don’t have the needed capital to get your business off the ground, you can actually dip into you IRA, 401(k) or other retirement plan to get the funds necessary. However, this cannot be done without using a C Corporation. This is because, you need to have a business that has the ability to offer qualifying employer securities, or stocks.
When utilizing the ROBS structure, a Corporation must be formed. You cannot use an S Corporation or LLC because of the previously mentioned ability to offer up stocks. In the case of an S Corp, only individuals may purchase stocks. Because ROBS relies on a 401(k) plan (a trust) to buy the stocks, it may not be used.
To get started on the ROBS, you must rollover previous retirement fund into a new 401(k) plan that is created. Once a C Corp is formed, it will sponsor your new 401(k) plan. You can then invest the 401(k) funds in stocks of the C Corp. Those funds are then deposited in the bank account of the C Corp and can then be used as capital to buy or improve a business.
Benefits of ROBS
- Using the ROBS structure in conjunction with a C Corporation offers one several benefits.
- Tax-free use of retirement funds as capital for your business
- The ability to earn a salary and be active within a business investment
- Invest retirement funds in yourself, instead of volatile markets
- Lower corporate tax rate thanks to the Tax Cuts & Jobs Act
- Offering a retirement plan can help attract and retain employees
- Strong creditor protection of your assets
The C Corporation is a powerful entity and best utilized with the ROBS structure.