Corporate Reorganization: Business Restructure as a C Corporation?
Have you heard about the new corporate tax law that was just implemented? Well, there are hundreds of pass-through companies that are intending to re-organize their business structure or corporate reorganization in 2018. And this is to obtain easy access to the lower corporate tax rate that was passed in the new law. The tax rate as per the new corporate tax law is now 21 percent. If you’re not clear? Here is all that you should know about it.
A professional from an accounting firm in Nevada and who has been in the business for over 20 years, customarily prepares about 1000 to 1500 tax returns for many small business clients every year. And as per his experience, there are generally very few returns for the C corporations.
The number of returns that the professional completed in 2016 for the C corporations were just four. But with the new law implemented, he anticipates filing hundreds of returns as the companies across the country restructure their business reacting to the extensive tax reform.
Corporate Tax Reform in 2018
As per the experts in the tax industry, this newly implemented tax law would bring a lot of positive effects for the small businesses. But the most noteworthy thing is the fact that the company receives a generous amount of financial relief. Since the new maximum corporate tax is just 21 percent, which is a huge drop from the previous 35 percent.
This new tax legislation that was signed by President Trump came into effect on the 1st of January 2018. Since the tax is favorable for those who own the C corporations and not any other one. Hence, there are many business owners who have and are still considering to reorganize their companies as C corporations.
Let us Understand – Why?
Many of the small companies in the United States are not eligible for the reduced corporate tax rate. Most of the small enterprises in the US are structured as pass-through legal businesses like the S corporations or the limited liability companies. In short, these company structures allows the owners to have their profits taxes as per their personal rates.
Even though there is a little tax relief in the bill for these pass-through firms, which includes a temporary ability to deduct up to 20% of their income, a lot of them can access the permanent cut by converting their businesses to C corporations.
Even though this is a technical escape clause, a lot of the small companies that are smart are taking advantage of it in 2018 while many would soon begin to enjoy the benefits. In short, it is a fantastic loophole for many out there who are tired of paying a tremendous amount of taxes on the profits that they earn for their business.
Other than this, many professionals in the financial field are recommending their clients to convert their company structure due to this. And for those who want to move ahead in this quickly, the process of converting their companies to a C corporation would take no more than a week. The catch here is that the company should be in the state that permits “statutory,” or streamlined conversions. And there are about 15 states that do not allow the statutory conversions.
Processes involved to convert a company to a C corporation
You might have to encounter a few hassles while trying to convert your company structure. Usually, you are required to file a set of articles of incorporation with the office of the secretary of state. Along with this, you need to draft a series of the corporate ordinances and also elect the corporate directors and officers. Other than these, you would also need to issue stock certificates and hold the annual board meetings.
And if the owners are smart, they would consider checking with their accountants and or their lawyers before converting their businesses. So, it is better to calculate the amount of money you would save and how much you would lose with this step. Since, if you are about to pay your lawyer more than how much you would save, it is not worth it.
Now that you have an idea of what we are talking about, there might be many questions in your mind about the new tax legislation. So, after our talk with the professionals in the industry, almost everyone has agreed that the conversion to a C corporation should not be taken lightly. Moreover, it depends more on how you make the profits and the amount you bring in on an annual basis.
Is conversion of your company to the C corporation the right decision?
It has to be kept in mind that the C corporations might be double taxed, mostly when the owners pay the dividends or when they begin paying 21% of tax for the profits as per the law. Another professional in our team shared that converting the company to a C corporation is not good for the short team. Due to the two levels of taxes, it would make the corporate operation less profitable as compared to the partnership.
Moreover, if you are not a person who pays out the dividends and are instead planning to re-invest most of the profits that you earn back into the business as a long-term strategy, that is when the C corporation idea is a good one.
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Meanwhile, the professional services that include freelance design work, financial consulting, or legal counsel are not qualified for the pass-through deduction under the new tax law. And if this is something that applies to you, it would be better to reconsider making time to reconstruct and plan to get around the double taxation.
Some of you might even consider breaking your business into two separate ones to enjoy the benefit of the reduced corporate rate and many other aspects of the new law. For instance, if you have a business of consulting and accounting, you can leave the accounting as an S-corporation and move the consulting part as a C corporation. This is so that you would not be double taxed.
Also, for those who are earning an income of less than $ 315,000 should not restructure since they are already paying less in taxes.
Even though the maximum corporate tax rate has been written as a permanent one, it can change in the future. And if that happens, it would be much more complicated to have your company converted back to the S corporation or the LLC.
As per the expert in our team, “The thing that Congress has done has made a world where everyone who is not an employee are now looking for tiny places and ways to pay the least amount of tax. Are you one of them? Before making the wrong decision, seek the help of a professional. You can contact us at IncParadise and get a better understanding rather than making the wrong decision.