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@061 CHAP ZZ
┌─────────────────────────────────────────────────┐
│ CAPITAL-INTENSIVE BUSINESSES: CHOICE OF ENTITY │
└─────────────────────────────────────────────────┘
In general, capital-intensive businesses, such as high-tech, retail,
and manufacturing firms, are still good candidates for incorporating as
C corporations, for several major reasons:
. Limitation of personal liability is often highly
important in these types of business (although an
S corporation will provide the same degree of
protection from creditors);
. Businesses of these types often need to retain
a significant part of their earnings to facilitate
expansion, pay off long-term debt, etc. Accordingly,
they are good candidates for income-splitting, taking
advantage of low corporate tax rates on the first
$75,000 per year of taxable income. They are not
subject to the flat rate 34% tax that applies to
certain personal service corporations. Also, by the
very nature of their business, it is often possible
to justify accumulating large amounts of earnings in
such corporations over the years without incurring
accumulated earnings penalty taxes, so long as the
retained funds are used for business expansion, and
not simply deposited in a bank account or invested
in stocks and bonds or similar non-business assets.
. These kinds of businesses may still adopt fiscal
tax years, which can be used, with proper tax
planning, to defer taxes (by using a January 31
fiscal year, for example, and paying January
bonuses each year to the employee-owners).
. Even if they are considered "closely held C
corporations," they may invest in activities that
generate passive losses and fully deduct these
losses against "net active income" (but not against
portfolio income) of the corporation.
. C corporations have the advantage of being able to
deduct medical insurance, medical reimbursement plan
payments, disability insurance, and group term life
insurance paid for owner-employees, which S cor-
porations and unincorporated businesses may not do,
except on a very limited basis.
While C corporations will face the problem of double taxation
when ultimately liquidated or sold, to the extent they retain income,
and to the extent they have assets that appreciate, the problem of
appreciating assets can be controlled somewhat by keeping assets that
are likely to appreciate greatly over time, such as real estate, out
of the corporation (by having the owners buy such assets and lease them
to the corporation). Double taxation on the retained income itself
will not occur unless you sell your stock or liquidate the corporation
during your lifetime, since the stock generally gets a step-up in basis
if it is included in your estate when you die (at least under present
law).