Buying or Selling a Business

Business formats -- C or "regular" corporation

With a regular C corporation there is "double-taxation." All that means is that the corporation is liable for tax on it's profit and if it later pays any of the profit to stockholders as dividends, these stockholders are also liable for tax on the dividends they receive. This is not particularly evil, even though in demagoguery it may be referred to as obviously a bad thing. It is simply that a corporation is regarded as a separate "person." In the case of a typical "C" corporation, it is not a "pass-through" entity.

Unlike with it's smaller cousin, the C corporation stock can be owned by anyone and is not restricted to residents of the United States and there is no restriction on non-resident aliens owning it. It can have only a few shareholders, or in the case of most public corporations, will have hundreds, thousands or millions of shareholders.

Why would anyone choose to go the regular "Subchapter C" corporation route? One of the primary motivations may be that the founders plan it as a "C" from the beginning because it is going to be a corporation in which shares of stock will be offered publicly. In order to raise millions of dollars, the founders may know that more than 75 shareholders will be needed. Further, it is true that after paying salaries of officers and all employees, and all other business expenses, the "C" corporation will then have to pay tax on any profit it has, and the shareholders will have to pay taxes on any dividends declared. However, the "C" corporation does not pay out all of it's profits as dividends. Instead, it typically plans to retain earnings for corporate growth and pay out only a market rate of dividends to it's shareholders. In return, it will have access to much more investment capital than the usual smaller corporation.

Unlike a partnership or LLC Limited Liability Company, and even more so than an S Corporation, a C Corporation needs to hold an annual meeting of shareholders. It needs to keep minutes of these meetings. It's major and many minor steps need to be documented. It can deduct as expenses many forms of employee benefits, such as health insurance premiums for the owners if these owners are also employees. It can have medical expense and day care payment programs for employees. But most important of all, it can arrange with securities lawyers and accountants to make limited offerings or public offerings of stock for sale.

A Subchapter C corporation may retain earnings remaining after paying out salaries and all other expenses. The earnings will not normally be taxed to the shareholders as long as these earnings are retained by the corporation instead of paid as dividends. These retained earnings will be taxed at the corporation taxation rates and will be held in the corporate accounts to be invested in corporate business.

If the owners eventually plan to take the business public or sell stock, it is best to start out from the very beginning as a C Corporation. While the business may not be public at first, the owners may plan to take it public later. In that case, too, they should plan from the very beginning not only to have their taxes prepared by professional accountants but to have annual financial audits done on their records by large accounting firms designated by the SEC or Securities Exchange Commission for auditing records of publicly held corporations. This will facilitate the review of past business practices and past accounting that will be necessary when they later prepare to offer stock to the public.

The C corporation, like the S corporation, must file it's Articles of Incorporation with the state it incorporates in. There will be a filing fee required by the state.

Separate Bank Accounts. If you need to pay personal expenses, take a salary, deposit your check in your personal account, and then pay. If you mix your funds with the corporation's, you may lose the protection of the corporate shield, because it will be easy for a legal opponent to "pierce" that shield and show that the corporation is really nothing but your alter ego. Don't pay your groceries or credit card out of the corporate account.
Same with assets: Don't use the corporate offices as an apartment unless you expect to have at least part of your office rent disallowed as an expense on the corporate ledger... unless, perhaps, it is a company retreat or vacation lodge allowed for all employees from time to time.
Make sure the corporation pays its taxes, and preferably, does so on time. Pay state registration fees. Ideally, these should be paid on time, too.