Option 4: C-Corp

By John Hazard  |  Print this article Print

Many VAR and reseller businesses start with an individual providing IT services to clients and getting paid and cashing a check. But just how that individual cashes the check will determine how much of the money he gets to keep come April 15. Here's a look at the best tax structures for VAR businesses.

4. C-Corp

A C-Corporation, is a full corporation and must maintain a board of directors and pay a corporate tax in addition to the personal taxes of the salaried employees including the owners.

Because of the extra tax, it is a poor option for most small business owners like VARs.

There are two reasons a VAR might consider a C-Corp status, said Berger.

One is that they expect to take on multiple investors early, which will require more than 100 shares and different classes of stock for active and passive investors.

The second is if they desire to operate on a fiscal calendar. This is more expensive and difficult to do, but it would allow the business owner to to defer income to the next calendar year and pay the corporate taxes and their own dividend outside the calendar year.

"No one-size fits all"

Unfortunately, it’s a difficult decision that might require accountants, business planners and lawyers.

"They’re all good options for the right situation," said Ulen. "It’s just a matter of knowing what your situation is and what you're expecting your situation to be.

"Ask yourself how many investors will you have? Do you expect losses in the first year? Second year? Will there be profits, net income, net losses right away? If so, for how long?" he said. "Be honest. What are you gonna live on? Will you have employees? When?"

It requires professional advice, but perhaps not as much as you think, said Sweeney.

"Most accountants will tell you that they won’t file articles of incorporation for you, that you need an attorney. And that’s mostly true," said Sweeney, a lawyer herself. "But you don’t need to have an attorney do all the advising for you. No one knows your finances better than your accountant. You can go to them for the guidance, than have the attorney file the paperwork. It might save you some money."

For her part, Sweeney generally recommends business owners treat incorporation like a sort of progression.

"You can start life as an LLC and then when you see where things are going and you want to take on the extra maintenance of an S-Corp, do that. And then maybe one day you graduate to a C-Corp," she said. "These aren’t for life. You can always opt to change it."