The success and viability of a C corp startup strategy for your Georgia business depends on several different assumptions and issues that should be discussed directly with your tax professional or tax lawyer.
In many cases, the theoretical tax benefits that are afforded by a C corp startup strategy do not outweigh the potential risk of double taxation within a C corp. However, for those high growth startups that need to be organized as C corporations for the purposes of meeting requirements established by investors, this can enable positive tax benefits for investors as well as founders.
Understanding a C Corp Startup Strategy
One of the most important components of this C corp startup strategy is to get the benefit of low corporate income tax without subjecting that income to additional taxation. Owners must be able to cash out on their investment without having to pay tax and therefore, there are two components that you might wish to discuss with your Georgia tax planning attorney.
The owners will need a reinvestment strategy instead of an earnings distribution strategy and internal revenue code 1202 must be met for the equity to be classified as qualified small business stock. Founders who choose to reinvest all profits generated by the company into growing the business do not have an ability to cash out on their investments until that company has been sold.
For those companies leveraging a C corp startup strategy, a public offering of the business or the private sale is their chance to reap the rewards. In most situations, a sale of stock that is placed inside a C corporation is considered a taxable event. In order to leverage the benefits afforded by the C corp startup strategy, founders have to sell stock in a tax-free sale.
There are some other benefits of pursuing the C corp startup strategy, but it is critical that you have the guidance of an experienced attorney to help guide you through these steps. Some of the benefits include no limitation on local and state tax deductions, tax free reorganization, fringe benefits for employee shareholders, being classified as deductible and no alternative minimum tax.
Our office is offering consultations on tax strategy planning- we’re still open, just not in the office.
Contact us to get help today.