C corporations are unique in that they have separate tax structures. This means that the corporation gets taxed differently from the owner. This is different from the way S corporations, sole proprietorships or partnerships are taxed. While C corporations are often looked down on because of the propensity to get double taxed, there are actually some great reasons why a business may want to consider this tax structure. For instance, C corporations allows for more tax free benefits than other structures. Below you will find some ideas on how to take money out of your business if you have a C corporation:
Salaries
Having a salary is one of the most common ways of taking money out of a corporation. Even if you are the sole shareholder of your corporation, I do recommend you pay yourself at least a minimal salary. Salary you take from the corporation is a deduction to the corporation and income to you. If your corporation has a high net income, paying yourself a salary could be a great way to reduce the net amount of taxes you pay.
Tax free benefits
C corporations can offer education assistance, health and insurance benefits, transportation benefits, moving and housing benefits, etc. These benefits allows the C Corporation to take deductions which in most cases, are not transferable as income to the owners.
Loans
A C corporation can lend money to its shareholders. When this is done, it should be very well documented. If not well documented or if done while paying yourself a low salary, the IRS can re-categorize this payment as dividends. You should also pay interest payments to your corporation for the loan – in the same way you do if you borrow from a bank. If the loan is for an investment, have the C corporation invest directly rather than writing the check to you and then to the investment.
Declare and pay dividends
This is my least favorite because of the double taxation issue. You are taxed once on the corporate level and taxed again when you file your personal tax return. This is because dividends are not deductible to the corporation but are taxable to the individual.
A lot of people choose business structures because they read a blog, talked to a friend or listened to a TV show. Corporate structures can be quite complex and jumping into a business structure without understanding could cause you problems. Before jumping into a business structure, have a good strategy. You should plan for how you will fund the business at startup, grow it and most importantly, exit it. It is best to begin with the end in mind!