C corporation? S corporation? Limited liability company? Whatever your current legal entity, you may want to make changes this year. The sooner you act, the more options you have.
There is a growing list of reasons to consider being a C corporation:
- Lower tax rates. Look for tax reform to lower the maximum corporate tax rate from its current 35% rate. This will enable the corporation to accumulate some of the corporation's earnings that can ultimately be harvested by owners at favorable capital gains rates.
- Access to funding. Starting this year, equity crowdfunding will enable C corporations to raise up to $1 million from numerous small investors.
- Potential for tax-free gains. There had been a 100% exclusion for any gain on stock acquired in certain types of C corporations before 2012 and held for more than five years. This tax rule could be re-introduced (currently there is a 50% exclusion, which isn't too bad).
- Do something to become ineligible for S status, such as transferring shares to an ineligible shareholder. This changes the status at the time of the terminating event.
- File a statement of revocation of S status with the IRS. You can file a prospective revocation saying that you want to terminate the S election as of the end of the current year. Alternatively, you can make a retroactive termination to the start of the year if the revocation is filed no later than March 15 of the current year (for a calendar year corporation). Also, check on steps needed to revoke any state S election.
Be sure to note that state income tax rules vary when it comes to S corporations. Check with the laws in your state and factor this in to your entity decision.
Whether you opt to be a C or S corporation, you can obtain a special designation as a B corporation. A benefit ("B") corporation is a special type of entity permissible in California, Hawaii, Illinois, Louisiana, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, South Carolina, Vermont, and Virginia. (Bills pending in 14 other states would also allow B corporations.) The "B" differentiates the corporation in three ways: higher standards of purpose, accountability, and transparency.