Corp To Corp: Everything You Need To Know - UpCounsel

Key Takeaways

• Corp-to-Corp (C2C) is a contractual arrangement in which a person forms an LLC or corporation to contract with another company as an independent entity.
• In a C2C arrangement, the individual’s corporation or LLC will be paid by the contractor company, with the contractor handling all the business and tax issues.
• Among the primary reasons employers prefer C2C arrangements are that they can reduce employment taxes, legal risks, and the likelihood of worker misclassification audits.
• For contractors, C2C offers higher pay, potential tax savings, business ownership, and more flexibility.
• Key features of a C2C agreement include project scope, payment terms, contract duration, intellectual property rights, roles, insurance, liability, and dispute resolution.
• Whether you choose C2C or W-2 depends on the nature of the work, whether you have control over processes, and specific legal and tax issues in your state.
• Consult a lawyer to ensure the contract meets legal standards.
• Post a job on UpCounsel to find a contract lawyer in your state.

Incorporated independent contractors have a “Corp-to-Corp” (C2C) business relationship with their clients. This implies that another business will pay an LLC or corporation for your services instead of an individual.

This article will discuss the pros and cons of C2C relationships, how Corp-to-Corp compares to W-2 and 1099, tax considerations, and other important details. 

What is Corp-to-Corp?

Corp-to-Corp refers to a business arrangement wherein an individual forms a separate entity, such as an LLC or S-corp, to contract with another company.  

In this setup, the individual is not an employee but operates as an independent business entity responsible for managing their taxes and other business obligations. 

How Does Corp-to-Corp Work?

Corp-to-Corp implies that instead of paying you, a person, you'll need to have an LLC or corporation through which another business will pay for your services.  

In this method, their "corp" might pay your "corp" instead of paying you personally. Corp-to-Corp implies owning a corporation, an LLC, or an S-corporation. 

To do so, you have to file your articles of organization for an LLC or your articles of incorporation for an S-corp with the Secretary of State. 

You should also have an operating agreement or bylaws to address your company's governance, which we’ll discuss later in this article.

Next, you have to be legally authorized for that company. For the services you're providing, some business permitting may need to be done locally. 

You must also file quarterly taxes with the IRS and the State Franchise Tax Board based on your business earnings.  

There are different rules concerning the company you're working for regarding how those services are distinguished from what an employee may be doing.

Advantages of Corp-to-Corp

There are certain advantages of Corp-to-Corp for employers as well as workers. 

For Employers

Employers favor Corp-to-Corp arrangements for three main reasons:

1. It trims employment taxes.
2. It cuts employment dangers (it can be harder to sue in a C2C relationship).
3. It reduces the chances that the employer might be audited for worker misclassification.

For Independent Contractors

Some of the advantages to being an independent contractor with a Corp-to-Corp arrangement include: 

• Increased pay — many estimates say most C2C preparations generate a pay increase of at least 10% over W-2 salaries.
• Leverage your business for potential tax savings that you simply couldn't have as a W-2 worker or a sole proprietor.
• You will have your own individual enterprise.
• Hire different workers to do the work.
• You can stack contracts.
• Earn a living from home.
• Having a corporation can shield you from the chance of a lawsuit, money owed, etc.
• More flexibility and control over your work
• Access to opportunities for business growth and networking.

Disadvantages of Corp-to-Corp

Corp-to-corp arrangements might provide more freedom and potentially greater income, but they also involve substantial challenges to consider before starting.  

These contracts entail more complicated tax-filing and compliance obligations, as C2C contractors must file their taxes, including self-employment and payroll taxes, and meet various other regulations. 

Second, contractors have financial risk and liability exposure – they have to cover business expenses and work through statutory protections.  

Business management skills can also be tested, as contractors must manage their billing, invoicing, and budgeting.  

Additionally, they may lack job security and benefits such as health insurance and retirement plans.

Corp-to-Corp, W-2, and 1099

The key differences between Corp-to-Corp and other arrangements like W-2 (employment) and 1099 (independent contractor without a business entity) are significant, particularly regarding liability, tax responsibilities, and flexibility in pricing services.

Corp-to-Corp vs. W2

With the W-2 tax method, you work as a consultant on a contract basis.  

W-2 contractors basically have the identical setup as full-time employees, except they are hired on a brief, contract basis.  

Depending on the employer's standard procedures, you might be paid a per-hour fee every two weeks through direct deposit or another method.  

Your employer often pays part of your taxes, such as federal, Social Security, or Medicare, about 8-9%.  

Moreover, your employer withholds a part of your paycheck for your income tax payments. 

You might be given employee compensation, and the employer is liable for any legal responsibility. You'll probably be eligible for advantages like important health care protection. 

As a full-time employee, keeping up with bookkeeping basics is important to avoid tax issues.  

Employers pay half of the FICA, Medicare, and Social Security taxes for W-2 employees. Independent contractors are responsible for 100% of these required taxes.  

Additional perks of working as a W-2 employee include:

• Paid time off
• Health care benefits
• 401(k) and retirement options 

With a Corp-to-Corp, you're a normal contractor. You must be an S-corporation or LLC, which requires some paperwork and a little money to start.  

There are also some small legal hoops to jump through.  

For example, you will be responsible for quarterly tax filings. You might be paid month-to-month; your S-corp or LLC invoices the company, which usually offers invoicing within 30 days.  

Note that this implies you may go as long as 60 days before receiving your first payment. 

Liability and liability insurance fall under the responsibility of the contractor's LLC or S-corp. Since you own the business, you can create a benefits package that suits your needs.  

The Corp-to-Corp relationship also allows you to customize your retirement plan and other key benefits.

When to Choose C2C vs. W-2 Employment

In many states, there's a right to control tests to distinguish employees from independent contractors. 

The IRS has various guidelines to determine whether someone is an employee or a contractor, and the answer could depend on who you ask.

Courts and state labor boards are concerned companies may be hiring contractors but not treating them as employees. This means they might not be providing them with the benefits, work rules, and rights that employees would have. 

Borello Test

In California, there is a test called the Borello test, which has 11 factors to distinguish between what really is an independent contractor, which could be in the C2C arrangement or a 1099 arrangement, versus who should be treated as an employee. 

Employees vs. Contractors

One factor is whether the person performing the services is engaged in a distinct occupation or business. 

For example, whether it's work that's usually done under the employer's direction or whether it's done by a specialist without supervision. 

If your business is a specialty business, then a C2C situation might be appropriate because you're essentially working independently.

Other factors include the type of skill required for the particular occupation, who provides the tools, and the place of work for the person doing that work. 

So, if you're working in your own office, then a C2C relationship could be suitable. 

If you work at the company's office, that would be one indication that you should perhaps be treated as an employee. 

Another factor is the length of time the services are being performed. As Michael Mowery, a California lawyer with expertise in business formation and structure, explains, if you've been working there for six months to a year, this could be another indication you are an employee rather than a contractor.

The payment method, whether you're being paid by the hour or by the job, is also a factor to consider, along with whether the work is part of the employer's regular business. 

Exceptions for Ride-Share and Delivery Drivers in CA

Michael Mowery also discusses how some states have exceptions for the distinction between employees and drivers for companies like Uber and Lyft. 

He explains that in California,  

“There are four different tests that a court or a labor board would look at in distinguishing the driver from what should be perhaps an employee relationship.  

One is that companies such as Uber or DoorDash do not unilaterally prescribe the dates, the times of day, or the minimum number of hours the driver must be logged in for the company.  

It does not require the driver to accept any specific ride-share service or delivery service request as a condition of maintaining access to the company's online application. 

It does not restrict the driver from performing ride-share or delivery services through another network.  

For example, you often see a driver working for both Uber and Lyft. The company does not restrict the driver from working in any other lawful occupation.

So, the separation of the driver from the controlling company is an indicator of whether this is essentially an independent contractor relationship or an employee relationship.”

Corp-to-Corp vs. 1099

Some prefer a Corp-to-Corp arrangement instead of a 1099, as it protects them from the risks regarding the employer-employee relationship.  

Even though you are paid via 1099, the IRS might still consider you an employee and disallow your independent contractor status.  

The major difference between C2C and 1099 is that with C2C, you don't have to pay self-employment taxes on your income. However, you must pay yourself a set salary and all required employee and employer taxes. 

To work as a 1099 contractor, the first step is to create a business that is not incorporated. This business entity will not exist independently of you, so you don't need separate bank accounts.  

If a 1099 contractor doesn't pay taxes, the IRS may go after the employer and hold the company liable for the tax requirement.  

However, the contractor is legally obligated to pay their own taxes, as none are withheld from their pay. Many 1099 contractors choose to take out insurance policies to avoid legal liability.

Corp-to-Corp Taxation

Independent contractors working Corp-to-Corp typically earn higher wages than their salaried counterparts.  

By pursuing a variety of contracts, consultants can speed up their income potential while gaining access to new opportunities and business contacts. They can also choose their pricing rather than being subject to a company's salary grade structure. 

Corp-to-Corp consultants don’t have payroll taxes deducted from their paychecks. This gives them quick access to their earnings for spending or investing.  

One distinction to notice with such an arrangement is a higher degree of accountability on the consultant's side regarding payment of all personal taxes due.  

Further, your taxes may sometimes be higher than those of an employee. FICA and Social Security are also calculated differently, reflecting the higher tax rates.  

Working with an accountant could greatly help Corp-to-Corp consultants understand the tax implications for C2C arrangements and ensure compliance.

How to Create a Corp-to-Corp Agreement

A C2C contract establishes a relationship between two corporations. These agreements should be clear, fair, and legal. 

Key Features in C2C Contracts

To meet these requirements, include these key features in Corp-to-Corp contracts. 

Project Scope and Deliverables 

• Definition: Define the tasks, deliverables, milestones, and deadlines.
• Purpose: This ensures both parties are clear about the scope of work and when it will be done. 

Payment Terms 

• Structure: Specify the compensation structure, including hourly rates, fixed fees, or milestone payments.
• Invoicing: Detail invoicing procedures and payment schedules.
• Penalties: Include penalties for late payments to protect the contractor. 

Duration of Engagement 

• Dates: Clearly state the start and end dates of the contract.
• Renewal/Termination: Include contract renewal or early termination provisions, including notice periods. 

Intellectual Property Rights 

• Ownership: Define who owns the intellectual property created during the engagement.
• Confidentiality: Address confidentiality to protect sensitive information. 

Roles and Responsibilities 

• Delineation: Define both parties' responsibilities, tasks, and communication protocols.
• Purpose: Prevents misunderstandings and ensures smooth collaboration.

Insurance and Liability

• Requirements: Specify the insurance requirements for both parties.
• Liability: Clarify how liability is allocated between the parties, including indemnification clauses.

Termination and Dispute Resolution

• Terms: Spell out the contract’s key terms and conditions.
• Conditions: Lay out the circumstances under which you can cancel the contract and the financial implications of doing so.
• Dispute Mechanism: Include detailed provisions about mediation or arbitration to handle contract disputes.

Compliance with Laws and Regulations

• Legal Compliance: Ensure the contract complies with relevant federal, state, and local laws.
• Industry-Specific: Address any industry-specific requirements that may apply.

Find a Contract Lawyer in Your State

As challenging as contract drafting may be, consulting with a lawyer familiar with your state laws is always a good idea. They can help you ensure the contract is legally sound and compliant with all applicable regulations. 

If you need help with a Corp-to-Corp relationship, post your legal needs on UpCounsel's marketplace.  

UpCounsel accepts only the top 5% of contract lawyers on its site.  

Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience. This includes work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.