C Corporation – Of the types of real estate entities, companies, and corporations, the C corporation is among the most popular for real estate investments and investors. It provides limited liability, and allows for many investors, unlike the S corporation. That means it is often explained as a more large-scale real estate investment business. We explain how to form a C corporation, documents for a C corporation, as well as advantages and disadvantages. It is possible to avoid double taxation with a C corporation, and we explain a step by step guide on how to save on taxes and create profit with a C corporation for real estate.
C Corporation: Formation, Advantages and Disadvantages
A C corporation, also called c corp, is, in contrast to the similar s corp, a true corporation. That means that some tax advantages dissapate, while some other advantages become apparent. Follow along to understand why, and in what cases the c corp can be the right decision for you.
Definition and Basics: C Corp as a True Corporation
A C corp is a taxable entity that acts as a corporation. Any real estate or objects it owns will also be in the name of the corporation, and any increase in value, e.g. through appreciation, will be taxed as a corporation.
- C Corporation = Taxable corporation
Forming a C Corp: How to, Steps, Documents
To form a C corp the first step is to choose where you want to file. Three main things to look out for: Filing fees (Nevada is most expensive, Hawaii, Colorado and Arkansas cheapest), the laws and bylaws, and whether your name is taken. Then you must gather your board of directors, with whom you will then file the articles fo incorporation with the state. Watch out though! This does not mean your corporation is formed, this is merely informing the state that you intend to form a corporation. Next you will decide with the board of directors how things work, who does what, and what is allowed or not allowed (i.e. formalizing the bylaws and finding an operating agreement). After this is done, it is put into writing, and passed on to the state.
- Choose a Location (e.g. Hawaii or Colorado)
- Find Board of Directors
- File Articles of Incorporation
- Operating Agreement
- Final Certification
- Operating Agreement
- Statement of Corporate Form/Management Structure
Advantages: Raising Capital and Liability
A C corp is a good way to overcome many of the issues of S corporations. For one, you have an improved ability to raise capital, because the structure makes bringing on investors much easier and more convenient. Additionally, there is, as with all forms of real estate entities, liability protection, meaning it is the corporation, not the individual behind it being liable. Lastly, a major advantage is that C corps are self-sustaining in a sense. Most business structures cease to exist once owners or investors leave. This is not the case for C corps though, which remain despite the owner leaving the company.
- Easier to Raise Capital
- Liability Protection
Disadvantages: Double Taxation, Regulations and Fees
Now, despite all its advantages, there are significant drawbacks. These have lead to many people proclaiming that no one should ever hold their real estate in a C corp, but this is of course not true. The biggest disadvantage is of course the double taxation. Many people seek a real estate entity to avoid exactly this double taxation. E.g. a limited partnership allows for investors to tax their profits only once, which is not the case for a C corp. Additionally, C corps have a lot of regulations which they must adhere to. That means a lot of paperwork for accountants or owners. Lastly, C corps can incur large costs to be formed as well as for upkeep.
- Double Taxation
- Lots of Regulations = Lots of Paperwork
- Large Fees for Incorporation and Upkeep
Investing in real estate and want to save on your taxes?
Real Estate C Corporation: Big Investments
For investing in real estate in a grand style, C corporations are just the thing. Now it is important to keep in mind the legalities behind actual c corporations and s corporations and what they mean.
What is the Difference Between an S Corp and C Corp?
In reality, there is no true difference. Even S corps are C corps, just that they have filed a different IRS form. An S Corporation is also called a Sub-S, and is a C Corporation that has filed Form 2553 and elected to be treated as described in Subchapter S of the Code. Of course you can always choose to go with multiple entities, which can give you advantages of each form of business.
S corporations = C corporations with Sub-S status
Terminology Confusion and Legalities – Investment Misunderstood
It should be mentioned that no matter what, every corporation which is created is a C corporation. There is no way around it. That means, by default, you are going to be forming a C corporation. It is only possible afterwards to file for an S corp election. This then takes the corporation to a Sub-S status.
How can C Corporations Avoid Double Taxation? Saving Real Estate Taxes
Everybody wants to pay less real estate taxes. Especially when you are paying taxes on income that is already taxed, which real estate investment often incurs. So, how is it possible to avoid the biggest disadvantage of C corps, double taxation? Let us explain. First, why this is a disadvantage, then the legal surroundings of converting to an S corp, how to convert to an s corp, and how long this process takes. Lastly, to get a lay of the land how much you’re paying, the full tax rates in US states for C corporations.
- Why is Double Taxation a Disadvantage for Corporations?
- Can I convert my C corp to an S Corp?
- How to Convert a C Corp into an S Corp
- How Long does it Take to Become an S Corp?
- How much are Taxes for a C Corp?
Why is Double Taxation a Disadvantage for Corporations?
In itself, the legal structure making double taxation possible is not a problem. Wanting profits from your real estate investment makes a problem. In fact, a corporation not being a pass-through entity like LLCs or s corps has many advantages. It is for these reasons that people choose the C corp. Double taxation is only a disadvantage when an investor, owner, or member, wants to receive money from the corporation. In the case of an S corp, this is declared as personal income, once. In a C corp, it is taxed once going into the company, and once going into your pocket
- Only a problem when withdrawing money
Avoid Double Taxation: Can I convert my C corp to an S Corp?
Taxes when buying real estate are already confusing and at times costly. As mentioned above, using a C corp means likely being subject to double taxation. Yet it’s possible to convert your C corp into an S corp, avoiding this problem. Some shareholders of C corporations never took advantage of the opportunity to convert and therefore remain subject to double taxation. Since the Tax Act of 1986, personal tax rates were reduced, making it possible to convert C corporations into S corporations. Because S corps have a more convenient tax structure, this would avoid the issue of double taxation.
- Yes, Since 1986 you can convert C corporations to S corporations
How to Convert a C Corp into an S Corp – Real Estate Investment
A possible solution to possibly avoid double taxation upon liquidation of property in a C Corporation is to convert the C Corporation into an S Corporation. To become an S Corporation, a C Corporation must file IRS Form 2553 with the IRS. This form must be signed by all shareholders, which means that each shareholder has veto power over the conversion from a C Corporation to an S Corporation. IRS approval of Form 2553 is routine (not discretionary) as long as the corporation meets the formal requirements for conversion.
- Use IRS Form 2553
- Get approval from all shareholders
How Long does it Take to Become an S Corp?
This depends on if you are an existing corporation or a new corporation. New businesses must file for an S corp election within 2,5 months of creation. For existing businesses, it is 2,5 months before the beginning of the respective tax year. Yet in total, for the governing body to approve a new corporation, it takes four to six weeks.
- 2,5 months or 2 months and 15 days
- Four to six weeks after filing
C Corp Tax Rates – How much are Taxes for a C Corp?
Considering double taxation, it is also important to look at the general tax rates for the C corp. This has important influence on the salary that investors or owners will receive. These have been set in the same form since a reform by the IRS in 2010. Take a look below, comparing income in USD to the tax rate for the investor.
- $0 – $50.000: 15%
- $50.000 – $75.000: $7.500 + 25%
- $75.000 – $100.000: $13.750 + 34%
- $100.000 – $335.000: $22.250 + 39%
- $335.000 – $10.000.000: $113.900 + 34%
- $10.000.000 – $15.000.000: $3.400.000 + 35%
- $15.000.000 – $18.333.333: $5.150.000 + 38%
- $18.333.333: 35%
C Corp Summary: For Big Investments
C corp is maybe a bit like the next step for many corporations. It is for more investors, and with greater possibilities. That doesn’t keep it from its own disadvantages though, as can be seen in the double taxation issue.
Comparison: S Corp or C Corp?
That’s the question. To find out, read our in-depth article on S corps. It should tell you everything you could need to know about whether to choose an S corp or C corp to reduce liability for your real estate business.