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14 October, 2022

What Dental CPAs Know About C Corporations and Implications for Taxes

If you own a new dental practice, you’ve likely incorporated your small business as a C-Corp by default. But is your dentistry business best served by a C Corp?

The C-Corp is frequently an overlooked option for small business owners. Choosing to be a C-Corp business does offer some structural advantages not found with an S-corporation or other business types like an LLC.

If your small business is a C-Corp, or you are thinking about registering as a C-Corp, and you aren’t sure how it may affect your financial situation.

Let’s begin by taking a close look at what a C-Corp is and how it may impact your business taxes.  

What is a C-Corp? 

A C-Corp is the most common type of corporation.  C-Corps are considered to be the “default” type of corporation. It is named for the subchapter of the Internal Revenue Code – subchapter “C” – under which its tax designation is described. Tax reasons are what make a C-Corp a C-Corp. 

With a C-Corp designation, a corporate income tax is paid initially by the corporation with a federal tax return – Form 1120. This form is required by the IRS. Afterward, shareholders have to then pay taxes on personal income at the individual level for all gains realized from dividends. 

C-Corps don’t have significant restrictions with respect to who can own shares. Meaning other businesses and entities in and outside the U.S. can have ownership. C-Corps, along with other corporations, have to adhere to operating rules known as “corporate formalities” so they can maintain corporate protections. 

Form Simplicity 

If your business is registered as a C-Corp, you won’t be encumbered with numerous forms to complete. There are also fewer steps involved to establishing a C-Corp. Because a C-Corp is considered to be a standard type of corporation. Meaning you will save  time and make the set-up process much easier. 

Preferred and Common Stock 

C-Corps can issue both common and preferred shares of stock. referred stock normally pays a predetermined dividend, typically to directors or select shareholders. But it does not give inherent voting rights.

Common stock is a security that represents ownership in a corporation. Holders of common stock elect the board of directors. Unlike preferred stock, common stock gives shareholders voting rights, typically at one vote per share owned.  

Unlimited Shareholders

When it comes to how many shareholders your dental practice can have, it is limitless. Shareholderscan also be any nationality or citizenship. This benefit of using a C-Corp entity provides advantages primarily for large companies seeking to be acquired or go public. This aspect of a C-Corp likely won’t be as relevant to a dental practice. 

Double Taxation 

If your dental practice operates as a C-Corp, you are required to pay taxes on your business income. A corporation is a separate tax-paying entity unless it opts to be taxed as an S-corporation. C-Corp businesses pay corporate income tax on its income – after offsetting income with losses, credits, and deductions. 

A corporation pays its shareholders dividends from its after-tax income. Shareholders pay personal income taxes on the dividends. This extra tax hit is what is known as double taxation. However, there are methods for decreasing or eliminating double taxation your tax accountant could recommend. 

In addition to double taxation, there are other disadvantages to your dental practice operating as a C-Corp.

4 Other Disadvantages of a C-Corp 

1)     Complexity

A C-Corp is more complex to operate, than an LLC, for example. The corporation laws call for more formalities with respect to how a corporation is managed. For instance, you are required to have director and shareholder meetings. Proper notice must be given, and you need to record meeting minutes. 

Conversely, with an LLC, your dental business can be managed more informally. Corporation laws typically have more rigorous record-keeping requirements. 

2)     Forming a Corporation Costs More

Lawyers will typically charge more to form a corporation. 

3)      States Have Higher Fees

You can count on your state charging annual franchise fees for dental businesses operating as a C-Corp. 

4)     Additional Federal and State Regulations & Oversight

As a C-Corp business, you will be subject to more complicated tax filings. For example, states mandate the filing of Articles of Incorporation, corporate bylaws, and annual reports. Corporations also are required to designate a board of directors and conduct annual meetings.

There are, however, some distinct advantages to operating as a C-Corp. Here are several. 

Advantages of a C-Corp 

Easier to Raise Capital

It is much easier to attract capital with the sale of bonds and stocks. A C-Corp business will enjoy an unlimited number of investors. Investors are inclined to prefer C-Corps. 

Owners Have Limited Liability 

As a business owner, your assets are protected from the debts and liabilities of the corporation. Shareholders are also not responsible for business losses.

Lower Maximum Tax Rate

There is a lower maximum tax rate compared to the maximum personal tax rate applied to S-corps, sole proprietorships and partnerships.  

Simple to Transfer Ownership 

Shares of stock are able to be sold. 

Some Expenses are Tax Deductible 

Business owners are able to receive tax-free benefits like deductions for retirement plans and insurance. 

Corporations Have Perpetual Lifetimes 

An entity continues to exist beyond the death of a business owner. 

6 Additional Advantages of a C-Corp 

1)     Widespread acceptance by venture capitalists and other investors 

2)     Separate legal identity 

3)     Separation between ownership and management 

4)     Well-established legal precedents 

5)     Ability to offer stock options 

6)     Tax planning opportunities

Choosing the Best Option for Your Dental Practice 

As you can see, there are distinct advantages and disadvantages to your dental practice operating as a C-Corp. DrillDown Solution typically recommends an S-Corp entity type for most practices but, it may be advantageous for some to choose a C-Corp.The best course of action is to talk with your tax accountant to determine if a C-Corp designation is well-suited for your dental business.

Look to Drilldown Solution for Expert Tax Planning Services for Your Dental Practice 

Drilldown Solution delivers a seamless tax planning and compliance process.  As is the case with all of our programs, tax planning solutions are custom-made based on the needs, wants, and the goals of your business.  You can expect your business to greatly benefit from our dedicated team of tax experts, ensuring your tax planning needs are met quickly and efficiently.  

At the core of our tax planning services is the promise to you that we will devise a tax strategy aimed at reducing your liabilities and optimizing profits for your business.

Our Provo, Utah Tax Planning Services are just what your small business needs.

Note: The material and contents provided in this article are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone. If expert assistance is required, professional advice should be obtained.

Ed Gabriel, CPA is President of DrillDown Solution and a graduate of Brigham Young University. His clients benefit from over 40 years of experience in maximizing profits, minimizing taxes and putting them in the best financial position possible.