Clever use of a "C" Corporation

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rrouse
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Joined: Sat Dec 20, 2014 6:26 am

Clever use of a "C" Corporation

Post by rrouse »

Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
Valuethinker
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Re: Clever use of a "C" Corporation

Post by Valuethinker »

rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
I believe the new US tax act, if passed (this week?) has significant ramifications on all this.

I don't think you should be soliciting advice from anonymous posters on the web.

Those who know, here, are likely professionals. Their ethics & practices agreements of their professions will prevent them giving advice except under the rubric of a written, signed client agreement- -and their liability insurance will be so phrased. I imagine they have to be really careful about what they write, even as anonymous posters on a blog like this.

The rest of us are amateurs (I am not US based).

You need, in other words, professional advice. And it sounds like you have enough money to pay for it.

Maybe your posting should be about how to go about finding a good tax CPA and also lawyer?

I know of someone in Los Angeles, CA who I would consider to be an individual of the highest care & ethical nature (although I have never been his client), however I don't think under Forum rules that I could just post a link to him. Also someone in Silver Springs MD who could perhaps refer you to someone (this individual is a CPA who is private wealth manager).
Allan
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Re: Clever use of a "C" Corporation

Post by Allan »

rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
I use an S-Corp as my primary business entity, but I also have a separate C-Corp I created 15 years ago to buy some apartments, which I've since sold. I basically keep the C-Corp alive for some of the very reasons you mention, but in reality those benefits are miniscule. C-Corps have a few downsides, primarily the double taxation aspect. That an the annual costs of keeping separate records and doing a tax return, make it more trouble than it is worth. Also some of the items you mention would make your proposed C-Corp a "Personal Services Corporation", which I believe has a high tax rate. I would recommend you consult with a CPA.
DavidRoseMountain
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Re: Clever use of a "C" Corporation

Post by DavidRoseMountain »

I remember when taking one of my tax classes when I got my masters in accounting that c corporations can accumulate these profits, but eventually they will get taxed on this accumulation. I can't quite recall the name of this accumulation, something like "Profits and earnings."
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gilgamesh
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Re: Clever use of a "C" Corporation

Post by gilgamesh »

Valuethinker wrote: Sun Dec 17, 2017 8:04 am
rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
I believe the new US tax act, if passed (this week?) has significant ramifications on all this.

I don't think you should be soliciting advice from anonymous posters on the web.

Those who know, here, are likely professionals. Their ethics & practices agreements of their professions will prevent them giving advice except under the rubric of a written, signed client agreement- -and their liability insurance will be so phrased. I imagine they have to be really careful about what they write, even as anonymous posters on a blog like this.

The rest of us are amateurs (I am not US based).

You need, in other words, professional advice. And it sounds like you have enough money to pay for it.

Maybe your posting should be about how to go about finding a good tax CPA and also lawyer?

I know of someone in Los Angeles, CA who I would consider to be an individual of the highest care & ethical nature (although I have never been his client), however I don't think under Forum rules that I could just post a link to him. Also someone in Silver Springs MD who could perhaps refer you to someone (this individual is a CPA who is private wealth manager).
This thread will probably get locked as the bill is not passed yet...however, why is general incorporation/tax discussion can only be done by professionals, where as financial advice, for which we have financial advisors, the whole purpose of this forum?

Curious what's so different between the two. Financial advice in most cases require individualized advice too...we are talking about general ideas on incorporating...I'm puzzled why you think one needs professional advice only for those?
technovelist
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Re: Clever use of a "C" Corporation

Post by technovelist »

rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
Let me preface this by saying that I am not a lawyer or accountant, so this is just my personal experience and thoughts on your questions.

I own a C corporation that maintains a profit sharing plan for me. This is at least as good a tax shelter as a 401k, IRA, or the like, and has fewer restrictions on what you can hold. Why hold money in an after-tax vehicle (like retained corporate earnings) when you can hold it pre-tax?

However, I would wait until the tax plan is passed before making any changes, because there can always be a change at the last minute even when it looks certain to pass.

As to your real estate question, I've never investigated this because I don't invest in real estate (other than owning my residence).
In theory, theory and practice are identical. In practice, they often differ.
Allan
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Re: Clever use of a "C" Corporation

Post by Allan »

gilgamesh wrote: Sun Dec 17, 2017 8:17 am
Valuethinker wrote: Sun Dec 17, 2017 8:04 am
rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
I believe the new US tax act, if passed (this week?) has significant ramifications on all this.

I don't think you should be soliciting advice from anonymous posters on the web.

Those who know, here, are likely professionals. Their ethics & practices agreements of their professions will prevent them giving advice except under the rubric of a written, signed client agreement- -and their liability insurance will be so phrased. I imagine they have to be really careful about what they write, even as anonymous posters on a blog like this.

The rest of us are amateurs (I am not US based).

You need, in other words, professional advice. And it sounds like you have enough money to pay for it.

Maybe your posting should be about how to go about finding a good tax CPA and also lawyer?

I know of someone in Los Angeles, CA who I would consider to be an individual of the highest care & ethical nature (although I have never been his client), however I don't think under Forum rules that I could just post a link to him. Also someone in Silver Springs MD who could perhaps refer you to someone (this individual is a CPA who is private wealth manager).
This thread will probably get locked as the bill is not passed yet...however, why is general incorporation/tax discussion can only be done by professionals, where as financial advice, for which we have financial advisors, the whole purpose of this forum?

Curious what's so different between the two. Financial advice in most cases require individualized advice too...we are talking about general ideas on incorporating...I'm puzzled why you think one needs professional advice only for those?
I did not see any reference to any proposed bill, just a general question about C-Corps. S-Corps are pass thru entities whereby owners and shareholders are taxed once on earnings. S-Corps do not pay taxes, only the shareholders do. With a C Corp the corporation itself is taxed and then when earnings are withdrawn as salary earnings are taxed the 2nd time.
Topic Author
rrouse
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Re: Clever use of a "C" Corporation

Post by rrouse »

Valuethinker wrote: Sun Dec 17, 2017 8:04 am I don't think you should be soliciting advice from anonymous posters on the web.

Those who know, here, are likely professionals. Their ethics & practices agreements of their professions will prevent them giving advice except under the rubric of a written, signed client agreement- -and their liability insurance will be so phrased. I imagine they have to be really careful about what they write, even as anonymous posters on a blog like this.

The rest of us are amateurs (I am not US based).

You need, in other words, professional advice. And it sounds like you have enough money to pay for it.

Maybe your posting should be about how to go about finding a good tax CPA and also lawyer?
Well, there are a lot of smart and experienced people around here and I find value in bouncing ideas off other in addition to my CPA and attorney, who would obviously be involved and validate any changes that I make. They don't always think of everything.
edge
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Re: Clever use of a "C" Corporation

Post by edge »

I tend to agree. Some professionals basically ‘make the donuts’. For some things it’s important to explore then yourself.
rrouse wrote: Sun Dec 17, 2017 10:37 am
Valuethinker wrote: Sun Dec 17, 2017 8:04 am I don't think you should be soliciting advice from anonymous posters on the web.

Those who know, here, are likely professionals. Their ethics & practices agreements of their professions will prevent them giving advice except under the rubric of a written, signed client agreement- -and their liability insurance will be so phrased. I imagine they have to be really careful about what they write, even as anonymous posters on a blog like this.

The rest of us are amateurs (I am not US based).

You need, in other words, professional advice. And it sounds like you have enough money to pay for it.

Maybe your posting should be about how to go about finding a good tax CPA and also lawyer?
Well, there are a lot of smart and experienced people around here and I find value in bouncing ideas off other in addition to my CPA and attorney, who would obviously be involved and validate any changes that I make. They don't always think of everything.
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Re: Clever use of a "C" Corporation

Post by zonto »

[delete]
Last edited by zonto on Mon Dec 18, 2017 8:40 pm, edited 1 time in total.
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mw1739
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Re: Clever use of a "C" Corporation

Post by mw1739 »

There was an interesting article in the Wall Street Journal a couple days ago on this topic titled: “For Pass Through Businesses, Let the (Tax) Games Begin.” You might be able to glean some ideas from the examples presented in the article.
H-Town
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Re: Clever use of a "C" Corporation

Post by H-Town »

rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
You have very smart ideas on using C-Corp as a vehicle to defer tax as long as you want. PTEs help you avoid double taxation, but tax planning (deferrals & tax credits) with PTEs might be limited. Every good tax strategy more or less involves deferring taxes and giving you flexibility to pay tax when you want. You might want to engage tax professionals and/or tax lawyers to make sure you are in compliance and every angles have been thought out carefully. Also you might want to look into related party rules, distribution in excess of accumulated E&P, etc.

1) I like this. Make sure you get over the hurdle of related-party transaction rule and avoid being treated as Professional Service Corp (PSC). Be aware that you will be subject to double taxation. When your C-Corp makes distribution to you and the entity have a large accumulated E&P, those distribution will be taxed as dividends. As long as it happens in many years down the road, this is a good strategy.

2) You need to make sure your C-Corp does not fall into Personal Holding Company (PHC). Your C-Corp must not have more than 60% of its income from dividends & interest. You also need to factor in taxation at C-Corp level. You don't want to pay 25% on C-Corp taxable income and pay an additional tax on dividends on your personal tax return. As long as your C-Corp has a legit business purpose, it can also hold investments and give you the desired benefits. You just can't set up a C-Corp and hold index funds for yourself.

3) You're right that I would prefer LLC to hold real estate and/or when I want to bring a building into LLC. You can read more about the disadvantages of owning real estate in a C-Corp here.
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casualflower
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Re: Clever use of a "C" Corporation

Post by casualflower »

You pay corporate tax on C Corp profits whether you take a dividend or not.
Osp62
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Re: Clever use of a "C" Corporation

Post by Osp62 »

FYI, you can also find a detailed paper linked from the WSJ article. This paper was written by about a dozen tax and law professors from major universities and was published on dec 7, 2017. The 35 page detailed paper is titled ‘The games they will play’ and has a whole section around use of corporations for investing and the possible tax issues.
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Re: Clever use of a "C" Corporation

Post by DrGoogle2017 »

Osp62 wrote: Sun Dec 17, 2017 12:10 pm FYI, you can also find a detailed paper linked from the WSJ article. This paper was written by about a dozen tax and law professors from major universities and was published on dec 7, 2017. The 35 page detailed paper is titled ‘The games they will play’ and has a whole section around use of corporations for investing and the possible tax issues.
Do you have a link to the wsj article. I’m unable to search for this article in my wsj online. Unfortunately, my husband used the Dec 7 paper for oil change.
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Re: Clever use of a "C" Corporation

Post by SuzBanyan »

According to Daniel Shaviro, one of the authors of that paper, an updated paper should be published in the next day or 2: http://danshaviro.blogspot.com. The current article is linked in his blog.
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vinnydabody
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Re: Clever use of a "C" Corporation

Post by vinnydabody »

A C Corp that sits on its earnings and profits as an accumulation vehicle could easily run afoul of the accumulated earnings tax to the extent the earnings exceed the ordinary and necessary needs of the business.
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Re: Clever use of a "C" Corporation

Post by EddyB »

zonto wrote: Sun Dec 17, 2017 11:07 am What you propose under (2) would likely subject you to the Investment Company Act of 1940: https://www.law.cornell.edu/uscode/text/15/80a-3.

Please speak with an attorney. The above does constitute legal advice.
You are assuming s/he’s going to co-own this C corp with more than 99 others? If you’re going to throw out ‘40 Act warnings, at least point out 3(c)(1)....
technovelist
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Re: Clever use of a "C" Corporation

Post by technovelist »

vinnydabody wrote: Sun Dec 17, 2017 9:19 pm A C Corp that sits on its earnings and profits as an accumulation vehicle could easily run afoul of the accumulated earnings tax to the extent the earnings exceed the ordinary and necessary needs of the business.
Yes, and that is after paying corporate taxes on the earnings!

I don't see the advantage compared to a profit sharing plan where you can sock away quite a bit tax-deferred.
In theory, theory and practice are identical. In practice, they often differ.
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Hayden
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Re: Clever use of a "C" Corporation

Post by Hayden »

SuzBanyan wrote: Sun Dec 17, 2017 6:55 pm According to Daniel Shaviro, one of the authors of that paper, an updated paper should be published in the next day or 2: http://danshaviro.blogspot.com. The current article is linked in his blog.
The paper is a great read. Highly recommend it. I am looking forward to reading the update when it is released.
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Re: Clever use of a "C" Corporation

Post by SuzBanyan »

Here is the update: https://papers.ssrn.com/sol3/papers.cfm ... id=3084187

There is a footnote to a blog in the update that may also be of interest to some: https://medium.com/@vthuronyi/a-mistake ... 6f55865e04
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rrouse
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Re: Clever use of a "C" Corporation

Post by rrouse »

Does anyone have their head around the mechanics of the "phase-out" of the 20% pass-through deduction above $315,000? Some years I've been at around the $350-400K mark.

Also, does AMT negate the deduction? Previously with AMT you had to add lots of the deductions back in.
Fulton_Sheen
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Re: Clever use of a "C" Corporation

Post by Fulton_Sheen »

thangngo wrote: Sun Dec 17, 2017 11:38 am
rrouse wrote: Sun Dec 17, 2017 6:42 am Hi,

I own all or part of several pass-through entities (S-corporations and LLCs) that collectively throw off a few hundred thousand dollars each year. In some cases the entities perform services (for fees) for each other, and it is plausible to split one of the corporations into two, if it made sense. I have lots of flexibility in how I structure it.

While money moves between the entities, ultimately they are pass-throughs, so it all ends up on my tax return.

So I'm wondering about a few things:

1) I could add a C corporation into the mix, perhaps by converting one of the entities that performs services for the others. Rather than pay a dividend, the corporation could sit on excess profits and be used to "throttle" the amount of money that finds it way onto my personal return. This might prove useful in calibrating my personal income to avoid phase-outs and such in the tax code.

2) Is there any reason why cash sitting in a "C" corporation can't be invested in index funds and used as an additional retirement savings vehicle when all others have been maxed out? I know Berkshire Hathaway invests in individual stocks. My thought is that in retirement, the accumulated profits can be paid out as dividends.

3) Is there any reason why a corporation can't (or shouldn't) own real estate? I know that LLCs are preferred for some reason.

Thanks!
You have very smart ideas on using C-Corp as a vehicle to defer tax as long as you want. PTEs help you avoid double taxation, but tax planning (deferrals & tax credits) with PTEs might be limited. Every good tax strategy more or less involves deferring taxes and giving you flexibility to pay tax when you want. You might want to engage tax professionals and/or tax lawyers to make sure you are in compliance and every angles have been thought out carefully. Also you might want to look into related party rules, distribution in excess of accumulated E&P, etc.

1) I like this. Make sure you get over the hurdle of related-party transaction rule and avoid being treated as Professional Service Corp (PSC). Be aware that you will be subject to double taxation. When your C-Corp makes distribution to you and the entity have a large accumulated E&P, those distribution will be taxed as dividends. As long as it happens in many years down the road, this is a good strategy.

2) You need to make sure your C-Corp does not fall into Personal Holding Company (PHC). Your C-Corp must not have more than 60% of its income from dividends & interest. You also need to factor in taxation at C-Corp level. You don't want to pay 25% on C-Corp taxable income and pay an additional tax on dividends on your personal tax return. As long as your C-Corp has a legit business purpose, it can also hold investments and give you the desired benefits. You just can't set up a C-Corp and hold index funds for yourself.

3) You're right that I would prefer LLC to hold real estate and/or when I want to bring a building into LLC. You can read more about the disadvantages of owning real estate in a C-Corp here.
I am very new here, and the reason I joined is because this is a topic I know nothing about, and wanted to learn more. Can you recommend any books on this topic? Also, who is most qualified to provide an optimal strategy, a CPA, tax lawyer?
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Re: Clever use of a "C" Corporation

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (business structure).

Fulton_Sheen is asking the same question here: Business Structures - learning the basics

I recommend responses go in Fulton_Sheen's thread.
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