CA ‘C’ Corp. - Posted by Kurt Schultz
Posted by Kurt Schultz on September 09, 2003 at 22:38:01:
For Mr. Bronchick:
While reading this article:
I’ve encountered a claim that needs to be qualified, in order to make the claim accurate. I’d appreciate it if you could verify what I say here and edit your article to make it more accurate.
6) INCOME SPLITTING
If you operate as a sole proprietor, you are taxed on all profits you make, even if you reinvest the money into the business. A “C” corporation is a separate taxpayer from you. The corporation pays its own tax, but usually at a lower rate than you pay (“C” corporation tax is only 15% up to $50,000). If you take a small salary and leave the rest of the profit in your corporation, you can effectively reduce your overall income tax.
The situation in California isn’t nearly as pleasant as you’ve portrayed here. We found that since my wife’s ‘C’ corporation was considered to be neither a sales company nor a service company, it was construed as a “personal holding company”, and the tax rate was nearly 34%. That was to be the starting tax rate, and is in fact higher than either of our personal tax rates would have been if we filed separately.
Another rude surprise for our situation was when we discovered that California requires that we pay a minimum tax every year, even if the corporation makes no profit.
Our reaction was to elect to have the corporation obtain ‘S’ corporation status. Unfortunately, that hasn’t been particularly satisfying either.