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Introduction
C Corporations are also known as a traditional corporation, a form of business that is founded as a separate and distinct entity in relation to its owners, once this kind of corporation is formed it can possess its own bank accounts, property, have the capacity to conduct business on its own or even be to establish its own credit line independent of entities that own or are shareholders of the business. The major advantage of creating a business as a corporation is the fact that the owners or the shareholders of the corporation are not liable in person in relation to debts and legal liabilities that are associated with the corporation, for instance, if the corporation is taken to court for business reasons and also loses, the owners or the shareholders of the corporation will not be held responsible for the debts that are incurred by the corporations the owners personal assets can not be used to satisfy the corporations debts. This offers great security to entities that own the business which makes it more attractive to would-be investors (John 1).
The major shift that took place in the Tax Reform Act in the year 1986 has contributed to the development strategies to the strict provisions that governed the liquidations of the corporate during the last two decades which includes the shift to S- Corporation. This process may lead to single taxation in regard to the shareholders instead of the double tax that is imposed on C-corporation. After transiting from a C-corporation to an S-corporation the S-corporation might find itself in tax consequences from earning and also profits that have accumulated from the time of regular taxation. This bottleneck is most likely to take place in a situation whereby there is a shift from C-corporation to S-corporation. The strategy used to overcome this challenge is waiting up to the time the major shareholders die before the S- corporation liquidation is done (John 1).
Income tax treatment of C corporations on liquidation
General, profit or loss is put into consideration in the process of liquidating a C corporation regarding the issue of distribution of property in total liquidation like assets were sold at their market value.
There is a tax imposed on profit in regard to liquidating a C- corporation which is considered as normal income tax. In a case of complete liquidation, every stakeholder affirms profit or loss to the extent of variance in relation to cash value and property that is received and also an income tax in relation to the stock that is given up, not putting consideration on the state in which distribution is received. Every stakeholders profit or loss is the variance in relation to the values of the distribution and also the basis of the income tax of the stock. If the stock has been on hold for a period that exceeds one year, the profit would be long-term capital profit. The income tax basis property that is received in a liquidation process is actually the current true distribution market value.
Hence, the liquidation process of a C- corporation entails double taxation, that is income tax in regard to the corporate stage on the profit or loss from distribution of the assets, the second level is the capital gains relating to the stakeholders level on any profit or loss that is involved in the liquidation process (John 1).
Income tax treatment of S corporations on liquidation
During the liquidation process of an S -corporation, profit or loss is generally not recognized in regard to the corporate stage but only if the in-built gains tax applies. The in-built profit tax applies only to the distribution of appreciated assets that are disposed of in a period range of ten years after a corporation attains the status of an S corporation. The tax that is imposed should be the maximum corporate rate tax under which the disposition takes place and applied to the lesser of the net of in-built profits and also in-built losses or the value of income tax if the business was not originally an S- corporation. Taxable income is put into recognition at the stakeholders level similar to C corporations. In the case of an S corporation that has no earnings and gains, the distributions are first considered as a non-taxable return in regard to the stock, the remainder is taxed as profit raised from sale or exchange of assets (John 1)..
In a case where an S-corporation has earnings and gains, distributions are dealt with as follows:
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A non-taxable return in regard to capital as much as the value of the total accumulation of adjustments account.
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Dividends of an S corporation are distributed to the extent of accumulated earnings and gains.
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A Non-taxable return of capital, determined by the value of the stakeholders stock that is remaining from profits arising from the sale of assets for the rest of the distribution.
Methods of Tax Accounting
The business choice of which accounting method to apply has a major impact on tax. There are two major methods, which are the cash and the accrual method. In regard to the cash method, a corporate does give a report on income when it is received and also gives reports of the expenses in the incidence that cash is disbursed. In regard to the accrual method, a business gives a report on income in an incidence that a corporation holds the rights of receiving income and also reports the expenses in an event that all events which culminate into a liability have taken place and the value of the expense is can be reasonably determined.
Generally, a business must put to use the accrual method of accounting if it is a Corporation (besides being an S Corporation) involving a partnership with at least one stakeholder, which is a C Corporation that is regular. Though there are Exceptions that exist in regard to the businesses of farming.
A business using the cash-basis method of accounting will desire to delay the end of the year billing, hence payment cannot be received until taxation for the next year is carried out. The business will also desire to incur any expenditures of planning into a current year of tax, instead of waiting for the following year.
The C- Corporation
Using a C-Corporation may offer numerous advantages associated with the tax. This is because of corporation tax rates that are graduated. As it is evident from the comparison table of rates, hence income taxed related to the Corporation can be lower than personal income.
Table of rate for C-corporation taxation
Value Rate
Regardless of these pros, owners of C Corporation is also faced with the potential of being taxed twice
A Company has the capacity to deduct ones salary that is of a reasonable value, in the case that it does pay one for the work rendered to the business. Although in this case, one has to still pay income tax that is based on the salary, the corporation can then deduct the payment which is regarded as an expense. Another way to get income from a Company is to purchase real estate or even equipment and then lease it back to the corporation. The rent should be reasonable. In this case, the corporation will pay a rental fee which in return shall be taxed.
S-Corporations
Paying taxes of stakeholders in regard to the share of the companys income that is not distributed does assets a shareholder in the case the shareholder does eventually sell his or her Corporation stock. That is due to the fact that the income does increase adjusted tax basis in regard to the corporates stock.
The stakeholders of an S Corporation have the capacity to take distributions from a corporation without withholding of income or even paying taxes associated with the payroll on them.
When a corporation is created the stakeholders must hold an election to obtain a board of directors that shall be entitled to the responsibilities of the company like operations, management and decision making, once the board is obtained it is its responsibility to come up with officers in regard to various duties associated with the corporation, which mainly entails the secretary, treasurer and public reactions.
In a C Corporation there are formalities that must be adhered to, these include an annual meeting of the board, and corporate minutes must be maintained, personal and corporate funds should be separated and records pertaining to all the corporate transactions must be maintained
Advantages associated with a corporation include limited liability in relation to the shareholders tax benefits, offers prestige to itself and the officers of the corporate, corporate are associated with credibility, a corporation has the capacity to raise capital and also is attractive to investors
Tax in relation to a corporate is the major disadvantage in that there is a form of double tax, a C corporation pays its income tax and then after distribution to all the shareholders they are taxed again, another disadvantage is increased of paperwork and numerous formalities that must be adhered to.
S corporation
S corporation does meet Internal Revenue Service (IRS) requirements, being taxed within the subchapter S. In this kind of taxation the S corporation is structured in such a way that its almost like a partnership, in that profits and losses are passed on to the stakeholders in proportions that are directly related to their shares in the company but their personal assets are still under protections just like in the C corporation. The stakeholders are liable to pay their share of income tax regardless of whether the profits have been distributed or not but there is no double taxation (John 1).
Differences between the C Corporation and S Corporation
Tax S corporation is not imposed twice, that is at the company stage and again at the stakeholders level while this is not the case with C corporations because tax is imposed twice.
S corporation has the capacity to provide savings form tax because profits from this kind of corporation are not subjected to self-employment Tax but before any distributions of profits are allowed stakeholders should be paid a reasonable salary of which it will be subjected to social security taxes and also medical taxes of which mount to the same amount imposed on self-employment tax, in regard to this fact the tax associated with savings is only imposed only when the corporate has achieved a significant amount of gain.
C-corporations are entities that are taxable, thus tax is imposed on its income if a plan is not instituted (John 1).
Familiarity
S Corps Professionals and their clientele are familiar with kinds of corporations. There is more certainty in regard to legal issues and tax.
C Corps Due to the fact that the c corps has been in existence much longer professionals and also their clients tend to be more aware of this kind of corporation.
Cost and complexity to establish
S-corps are generally less expensive as far as creating them is concerned this arises from the fact that there are provisions that is in the by-laws that make it much more convenient to form them, in that there are no elections associated with the tax.
The stakeholders may or may not enter into buying or sell agreements during the establishment of a C Corp (John 1).
Internal Revenue Service election requirements
S Corps There must be adherence to the requirements imposed by the state, an election must be carried out in a period not more than two and a half months of the year of tax so that the tax can be imposed under the definition of an S corp, consistent monitoring must also be carried out so that all the requirements of an S corp are maintained throughout.
C Corps Tax imposed on income for the C corps is done at the company level on the companys net income that is taxable.
Tax year
S Corps S corp. It is required of the S corps to make use of the normal calendar on tax unless otherwise, after following some regulations by the Internal Revenue Service.
C Corps Generally have the capacity to choose what year to use for taxation, but in this case, personal service corporations must use a calendar year unless they make a Section 444 election of it which may defer the deductibility of a portion of their shareholder compensation and other expenses paid to a shareholder or even an employee
Ownership
S Corps No minimum number of owners is required to be a separate taxable entity with pass-through taxation
C Corps No minimum number of owners that is required
The maximum number of shareholders
S Corp should not have stakeholder that exceeds seventy-five and in the case where shareholders are joint then their share is considered as one unless in a case that they are married to each other.
C Corps There is no upper limit as to the number of shareholders.
Owners that are Eligible
S Corps Has defined limits as to who is permitted as a stakeholder Generally, only American citizens, aliens who are residents, real estates, plans of retirement that are qualified, some entities of a charity, and some stakeholder can be trustees
C Corps any person or an entity both domestic and non-domestic can be a C corp stakeholder but remain under legal regulations
Owner contributions of noncash property to entity
All contributions associated with S corp are taxable in regard to the shareholder in proportion to their contributions in a case that the shareholders liabilities do exceed the stakeholders basis of taxation in regard to the assets that he contributed, then the stakeholder as an entity does have a value that is less than eighty percent in regard to the corporation, if not the case then the S corp will be regarded as a company of investment
Cases of allocating special income tax are not requirements or allowed by S corporations. C Corps Same tax treatment of noncash contributions by stakeholders to the corporation as with S Corps (John 1).
Conclusion
In this case selecting which kind of a corporation to start depends heavily on the method of taxation one wants to use and what mode calendar to apply. However, the by-laws have improved the issue of double taxation by instituting S corporations, in modern times it appears that more people want to use the S Corporation in an instance that they want to minimize their taxes since in this scenario the corporations are not taxed instead the shareholders are the ones that are taxed on basis of income tax
Reference
John, W. Tax Accounting Methods . (2011) Web.
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