Note: All references to corporations in this blog post are referring to C-Corporations.
Corporations are formed under state law so you will need to refer to your state for specific, but in general the following are some of the advantages of establishing a C-Corporation:
- A corporation is a separate legal entity, which generally means that the shareholders are not liable for the corporation's debts.
- A shareholder can generally only lose the amount of money they invested in the corporation's stock.
- Hobby loss rules do not apply to corporations
- The corporation can loan you money
- You can loan money to the corporation and receive principal and interest payments from the corporation.
- C-Corporations can generally deduct a percentage of dividends received during the year.
- Small corporations are exempt from alternative minimum tax (AMT)
- Dividends to shareholders are reported on Form 1099 and taxable up to the amount of the corporation's "earnings and profits" after that the dividends are nontaxable up to the shareholder's basis.
- Shareholders who sell their corporation stock at a loss are potentially eligible to deduct up $100,000 of that loss (this applies to small business corporations only)
- Shareholders who sell their corporate stock at a gain can potentially either postpone the gain if they use the proceeds to purchase another small business stock or exclude up to 75% of the gain if certain restrictions have been met.
Tax law can change daily, please talk to your tax adviser before making decisions that will affect your taxes.
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