What is a C Corporation?
A C corporation is a type of business structure in which the company is owned by the shareholders. These shareholders have the power to elect a board of directors who help to make governance decisions around how the company is operated. Notably, corporations represent separate legal entities, meaning both legal and financial liability is that of the corporation rather than the business owners.
Why Should I Form a C Corporation?
Investors, owners, and shareholders of C corporations can all reap the benefits of section 1202 of the IRC, which outlines QSBS.
QSBS is a tax incentive which rewards taxpayers for investing in small businesses by allowing them to exclude a portion of their capital gains from their taxable income.
According to section 1202, the taxpayer who holds shares for 5 years or more before selling, can exclude 50%, 75%, or 100% of his or her capital gains up to $10 million or 10X the adjusted basis of the stock, whichever is larger.
A few criteria points must be met to benefit from this section of the code including that the corporation cannot have more than $50 million in gross assets at the time of acquisition of the shares. If the corporation later exceeds $50 million, the shares issued prior to exceeding the asset threshold will still qualify.
How to Form a C Corporation?
- Search your local and state database to find a suitable and available business names for your corporation.
- Apply for an employer identification number or other form of tax identification.
- Appoint the directors.
- File articles of incorporation in order to register your C corporation. These have associated filing fees that range from $100 to $800 depending on what state you wish to incorporate in.
- Issue stock to any initial shareholders.
- Seek any licenses or permits that may be necessary to the specific trade of your business.
Looking for specific advice on QSBS and Capital Gains? Contact us to learn more.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.