The Tax Adviser has an interesting article by Michael F. Lynch, David B. Casten, and David Beausejour about the tax consequences of moving from a C corporation. They propose many business look at converting this year for several tax reasons.
Small businesses have shied away from C corporations to avoid double taxation to the owners. In a nutshell; the company had to pay taxes on the revenue of the company. Then when the owners took salary or dividends they needed to pay taxes on their personal income. There are methods to reduce this though compensation packages but that does have its limits.
The most straight forward approach is to move to an S corporation. This only requires the company to elect to move to an S status. This only works for small and medium businesses as there is a limit of 100 shareholders for S corporations. There must also only be one class or shareholder. But if done this eliminates the problem of double taxation for the shareholders.
A more difficult option is to move from a c corporation to an LLC (limited liability corporation). The same size limits and class of stack apply as with an S corporation. An LLC is a popular election to provide the liability protections that come with a corporation but without the problems of double taxation. The problem with moving from a c corporation to an LLC requires that the company be liquidated to the shareholders. The shareholders then transfer the assets back to the LLC. This is taxable event when the company is liquidated.
So why do the authors think that 2012 is a good time? Two reasons might make this a good year. The first is that real estate values are still low to the taxes on the liquidation will be lower. The second is that tax rates are still at low levels that are likely to rise as congress tries to reduce the debt.
In the end the calculation is always the amount of taxes that shareholders will have to pay less the the taxes they anticipate saving over a chosen time period. A good small business accountant can guide you through what type of company will save the owners on taxes.
Small businesses have shied away from C corporations to avoid double taxation to the owners. In a nutshell; the company had to pay taxes on the revenue of the company. Then when the owners took salary or dividends they needed to pay taxes on their personal income. There are methods to reduce this though compensation packages but that does have its limits.
The most straight forward approach is to move to an S corporation. This only requires the company to elect to move to an S status. This only works for small and medium businesses as there is a limit of 100 shareholders for S corporations. There must also only be one class or shareholder. But if done this eliminates the problem of double taxation for the shareholders.
A more difficult option is to move from a c corporation to an LLC (limited liability corporation). The same size limits and class of stack apply as with an S corporation. An LLC is a popular election to provide the liability protections that come with a corporation but without the problems of double taxation. The problem with moving from a c corporation to an LLC requires that the company be liquidated to the shareholders. The shareholders then transfer the assets back to the LLC. This is taxable event when the company is liquidated.
So why do the authors think that 2012 is a good time? Two reasons might make this a good year. The first is that real estate values are still low to the taxes on the liquidation will be lower. The second is that tax rates are still at low levels that are likely to rise as congress tries to reduce the debt.
In the end the calculation is always the amount of taxes that shareholders will have to pay less the the taxes they anticipate saving over a chosen time period. A good small business accountant can guide you through what type of company will save the owners on taxes.
Labels: business taxes, c corporation, llc, s corporation
