Save US Tax Using A C Corporations Tax Structure

simon

Simon Misiewicz

4th August 2021

The frequently asked questions about C Corporations in the US

As property and tax accountants, we are regularly asked about C Corporations. We will look to answer the below questions in this Article.

“Are you paying too much tax?”

“What are the basics of C Corporations?”

“How is a C Corporation taxed?”

“How do I form a C Corporation?”

“What are the advantages of a C Corporation?”

“Is a C Corporation more tax-efficient than an LLC?”

“How is a C Corporation structured?”

“How can a C Corporation owner avoid double taxation?”

“Can I live in the UK and run a C Corporation in the US?”

“How does this affect our UK readers?”

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Are you paying too much tax?

As US/UK ex-pat tax experts, we know that the appeal of setting up and running a business in the US is strong.

There are favourable tax laws and many US states have superb enticements to attract new British business owners.

There are many reasons why British people living in the United States pay far more tax than they need. This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist that knows all the UK and US tax laws.

-Their accountants in the UK are not knowledgeable when it comes to the US tax laws under the IRS.

-Their CPAs are not knowledgeable when it comes to the UK tax laws under HMRC.

-They are unaware of the most tax-efficient business structure to utilise in the US.

-They have not consulted a tax accountant with expertise in business management.

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What are the basics of C Corporations in the United States?

Corporations have been established for over 500 years as a legitimate way to limit their owners’ personal liability and to encourage business investment.

Under US law, a C Corporation is an entity that is taxed separately from its owners.

Most companies are treated as C Corporations for US federal income tax purposes.

A C Corporation can own its own property, enter into contracts, sue or be sued in court, lend or invest money.

Once incorporated in a US state, a C Corporation is created as an entity and enjoys limited liability.

C Corporations are subject to corporate income taxation.

As with other businesses, corporations file annual reports with the owners of a C Corporation called shareholders.

Corporations are owned by shareholders and managed by directors and/or officers. A C Corporation may have 100’s or even 1,000’s of shareholders.

Forming a corporation can be a good option if you are looking to set up an IPO (Initial Public Offering).

Some business investors and venture capitalists also prefer to do business with a corporation rather than an LLC.

The board of directors of a corporation are elected by shareholders and are responsible for overseeing the corporation’s business.

Corporate officers carry out the daily management of a corporation.

Corporate bylaws contain the rules for conducting a C Corporation’s affairs.

These bylaws include things such as directors’ committees, shareholders’ meeting specifics (such as date, place and giving notice), office location, as well as the powers, duties and qualifications of a corporation’s directors and officers.

In a small corporation with a handful of shareholders, individual business owners usually carry out several different roles at once, such as being a shareholder, officer and director.

How is a C Corporation taxed by the IRS in the United States?

For US federal income tax, a C Corporation is classified as a separate taxpayer.

A C Corporation files its own income tax return and pays its own income tax, in the same way as an individual.

Dividends paid to corporation shareholders are subject to double taxation. The company’s profit is taxed by the IRS and the owners are taxed on their 1040 tax return.

The C Corporation pays tax on its income. Shareholders must also pay taxes on C Corporation dividends.

A little-known tax element of C Corporations is that with proper tax planning, owners can avoid (or significantly reduce) double-taxation by using tax-saving strategies legally available to them.

Owners may, for example, keep earnings in the corporation for reasonable purposes, instead of distributing them as taxable dividends.

C Corporation owners could also have a lower tax liability to the IRS by combining salary and distributions with a reduced (or zero) taxable gain on the sale of qualifying stock.

The IRS code section 1202 gain reduction available to C Corporations can be relevant in this context.

It is also worth reviewing information on corporations from the IRS to see specific details.

The main US federal tax forms for C Corporations include Form 1120 or Form 1120-A for Corporate Income Tax Returns, Form 1120-W for Estimated Tax for Corporations, Form 8109-B Deposit Coupon, and Form 4625 Depreciation.

How do I form a C Corporation?

In the US, a C Corporation is formed under the laws of a state with procedures varying widely.

Corporations are issued with a Certificate of Incorporation by most states under formation.

All US states require payment of a fee upon incorporation, with some states allowing the formation of corporations through electronic filing on the state’s website.

Most state corporate laws dictate that the governing instrument of a C Corporation is either the certificate of incorporation or formal articles of incorporation.

Most states require at least one director and two officers, all of whom can be the same person.

There are generally no residency requirements for directors or officers, although foreign aliens have to form C Corporations via registered agents in many states.

The process of forming a C Corporation involves filing Articles of Incorporation, designating a registered agent, and paying the state’s fee.

An organisational meeting is usually held as well as the adoption of corporate bylaws.

While each US state has individual rules for what it requires for in Articles of Incorporation, this usually includes:

– Corporation’s name

– Number of authorised shares

– Corporation’s registered agent and office

– Names and addresses of incorporators

Some states may ask for the corporation’s purpose and the names of initial directors.

Optional items in the Articles of Incorporation can include provisions concerning management and the powers and authority of directors and shareholders.

The Articles of Incorporation must be filed with the Secretary of State according to the laws of that state.

Stock is offered to shareholders who then become owners of the corporation.

The IRS has produced helpful information on forming a corporation which is worth reviewing.

What are the advantages of a C Corporation?

Setting up a C Corporation offers many advantages over other US business structures such as an LLC.

Corporations can sell shares of stock to raise money to fund the growth of the business.

Shareholders only pay tax on salaries, bonuses and dividends they receive.

Profits made by a C Corporation are subject to a corporate tax rate that is usually lower than personal income tax rates.

Corporations can compensate employees with stock, as well as offering job benefits.

All C Corporations limit the personal liability of directors, shareholders, officers and employees.

The legal obligations of the business cannot become a personal debt obligation of any individual associated with a C Corporation.

Owners and managers can change and/or be replaced, but a C Corporation still exists in its own right.

All C Corporations are required to register with the Securities and Exchange Commission (SEC) upon reaching certain thresholds.

The ability to offer shares of stock allows a C Corporation to obtain large amounts of capital to fund new projects.

Corporations may also have an unlimited number of shareholders from anywhere in the world.

For example, corporations in Wyoming and Nevada can have directors and officers residing anywhere in the world, which can be attractive for foreign investors.

C Corporations have the widest range of tax deductions and expenses allowed by the IRS.

Corporations are the most widely-recognised form of business entity in the world.

Is a C Corporation more tax-efficient than an LLC?

A Limited Liability Company (LLC) is a specific form of a private limited company in the US.

It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

Pass-through taxation allows the income or loss generated by the business to be reflected on the personal income tax return of the owners.

This special tax status eliminates any possibility of double taxation for LLCs, unlike with a C Corporation.

An LLC can have unlimited owners, as well as having non-US citizens as shareholders.

LLCs are more flexible than corporations in distributing profits, where a C Corporation can usually only have one class of stock.

An LLC can have multiple different classes of interest, and the percentage of pass-through income is not tied to ownership percentage.

LLCs have limited life spans and in a few US states, LLCs are required to list dissolution dates in their Articles of Organisation.

Certain events such as the death or withdrawal of a member can cause the automatic dissolution of an LLC.

The stock of corporations is freely transferable, while the interest and ownership of an LLC are not.

Corporations may be advantageous in terms of self-employment taxes in comparison to LLCs.

In a corporation, only the salary paid to the employee-owner is subject to self-employment taxation.

The remaining income that is paid as a distribution is not subject to employment tax under IRS rules.

There is therefore the potential to achieve significant employment tax savings in a C Corporation structure.

How is a C Corporation structured in the United States?

A C Corporation chartered by the state in which it is headquartered is considered by law to be separate and apart from those who own it.

The owners of a C Corporation are the shareholders who elect a board of directors to oversee major policies and decisions.

Shareholders have limited liability for a corporation’s debts, and can only be held accountable for their investment in the stock of the company.

A C Corporation can raise additional funds through the sale of stock.

Corporations may deduct the cost of benefits it provides to officers and employees.

A C Corporation pays 21% tax but is increasing significantly. In 2021 President Biden proposed that Congress raise the corporate rate from 21% to 28%

Corporations are monitored by federal and state agencies, which can result in more paperwork to comply with regulations.

Incorporating a business may result in higher overall taxes.

Dividends paid to shareholders are not tax-deductible from business income, so income can be taxed twice.

Although double taxation isn’t favourable, the ability to reinvest profits in the corporation at a lower tax rate is an advantage.

A C Corporation is required to hold an annual meeting for shareholders and directors.

Minutes must be kept to display transparency in the operation of the business.

A C Corporation must also keep voting records of the company’s directors and a list of the owner’s names and ownership percentages.

Corporations must also file annual reports, financial disclosure reports and financial statements.

How can a C Corporation owner avoid double taxation by The IRS in the US?

The most commonly cited disadvantage of using a C Corporation is the double taxation issue.

Double taxation occurs when a C Corporation has profit left at the end of the year and wants to distribute it to shareholders as a dividend.

The C Corporation has already paid taxes on the profit. Once it distributes the profit to its shareholders, they will have to declare their dividends received as income on personal tax returns and pay taxes again.

There are several legal steps that can be taken to avoid double taxation of a C Corporation, such as:

– Use all of the write-offs and deductions allowed by the IRS to reduce the corporation’s net income

– Pay higher salaries than using a pass-through entity like an S Corporation

– Offer exceptional employee packages and benefits, as these are tax-deductible

The decision on whether or not to adopt a C Corporation will often hinge solely on the tax position of the business structure.

 

Can I live in the UK and run a C Corporation in the US?

Short answer? Yes. There are two types of corporate entities non-US citizens can open:

– Corporation (C Corp)

– Limited Liability Company (LLC)

There is the additional option of an S Corporation which are often recommended to foreigners.

Many new businesses choose the C Corporation business structure in the US.

A C Corporation has the ability to expand by offering unlimited stock which is attractive to investors.

Foreign investors also favour a C Corporation for its ability to protect them from close IRS involvement.

That protection comes at the cost of double taxation, but that can be avoided through careful tax planning, which can be structured to cancel out most of the double taxation.

There are some distinct advantages for foreigners incorporating as an LLC.

The most obvious is limited liability, meaning that members are protected from personal liability for business decisions, and personal assets are safe if the LLC incurs debt or is sued.

LLCs are also free from the strict record-keeping necessary for C Corporations.

There are almost no restrictions on profit sharing between LLC members.

Whether you decide to establish a C Corporation or an LLC in the US and you are living in the UK, one consideration that affects both business structures is where to register the company.

The best US state to register in is the one in which you will be conducting business.

If you are an online company or intend to do business across some regions, it may well be worth considering registering in a state with lower tax burdens, such as Delaware and Nevada.

You may be interested in services where we help Americans move to the UK with tax in mind. There are a number of legal matters and tax issues that you need to consider. We have also written a useful article about people moving from the US to the UK and getting a VISA.

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