And Why Every Entrepreneur Should Know About It
by James Crane, Tax Services Practice Leader
The C Corp doesn't get much attention. In my experience with our clients, it is not well known. While many entrepreneurs gravitate towards and are best suited with an LLC or S Corp corporate structure, understanding the uniqueness of a C Corp as an alternative is important.
Let me start by sharing two profiles that may be appropriate for a C Corp structure.
The first is a high-income earner in a family-owned business.
The second is a group of like-minded individuals who wish to use the business entity primarily to aggregate cash investments and grow the value of those assets inside the entity.
In contrast, one of the worst profiles for a C Corp is an individual or any other group of shareholders or investors who intend to use the entity, a business entity, primarily as a source of liquidity. In other words, they're running a business and consistently drawing liquidity or cash from that business. That kind of operational use of cash consistently or withdrawal from the company doesn't fit with a C Corp.
What Is Section 1202?
Section 1202, also called the Small Business Stock Gains Exclusion, is a portion of the Internal Revenue Code (IRC) that allows capital gains from select small business stock to be excluded from federal tax. Essentially, if you grow your C Corp business and hold it for an extended period, approximately five years or more, the first $10 million you generate from that business sale will be tax-free.
Let me repeat. You sell your C Corp business for $10 million and get $10 million in your pocket. No tax, no income tax.
Another scenario I see with a few of our clients is to use the C Corp structure as part of estate planning. It is one way to avoid probate complexity and organize assets in a way that is not difficult to track or value.
The C Corp is narrow in its application for most startups. It is very specific about establishing the entity and has detailed compliance requirements. For example, a potential hurdle is the actual issuance of stock. Suppose the owner does not record the board minutes and write a board resolution to memorialize the stock issuance transaction starting the company. In that case, the tax benefit will not occur. However, it is an important option for biotech and technology entrepreneurs to understand as they consider optimizing their company formation.
How can we support you in achieving your organization's financial sustainability and growth?
Charles River CFO, Inc. provides exceptional financial leaders who deliver customer-focused solutions. James Crane, CPA, leads our Tax Services Practice and serves in the CFO role for business clients who request ongoing assistance with managing and minimizing taxation. He has saved our clients hundreds of thousands of dollars in R&D tax credits. James also leads our technical accounting projects, specializing in complex areas, including mergers & acquisitions, equity accounting, revenue recognition, etc.
We are smart, nimble, and flexible.
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