Meaning of C Corporation: Everything You Need to Know

Unlike an s corporation , shareholders can’t deduct losses on their personal tax returns. Many states also pass profits and losses through to the owners of S corporations. However, a few states engage in double taxation of S corps. The Corporate Income Tax rate on C Corporations is 5% on South Carolina taxable income. The starting point in determining South Carolina taxable income is federal taxable income with certain South Carolina modifications subject to allocation and apportionment. Multi-state corporations must directly allocate certain nonbusiness related items of income and gains and losses and apply an apportionment ratio to all income remaining after allocation. Corporations involved in manufacturing, selling or otherwise dealing with tangible personal property use an apportionment ratio based on sales alone.

For comparison, the current maximum personal income tax rate is 37% for incomes above roughly a half million dollars. Current rates for other income brackets can be found here.

C Corporation Taxation Guide

If your long-term business plan is to not pay out dividends, however, the C Corporation option may be more advantageous. Profits that are reinvested in the corporations are not double-taxed, so the lower corporate rate and the growth of the corporation’s value could be a better bet for owners. Beware, however, of the C Corporation accumulated earnings tax—a 15% tax on earnings held in the business beyond its reasonable needs. Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S-Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway.

As companies become more complex and profitable, partnerships and proprietorships tend to be less suitable. S corporations are a very popular entity choice for small and mid-sized privately held companies. Part of the simplicity of a partnership is that partners do not receive wages, but rather guaranteed payments for their services. If there are no non-owner employees, the partnership does not need to run payroll or file payroll reports.

Join 446,005 entrepreneurs who already have a head start.

Before you do, you have to choose a name and choose your corporation’s registered agent. Both the name of the corporation and the registered agent have to be included in the Articles of Incorporation. Actually, you don’t “become” or “form” a C corporation or an S corporation. And you do that by filing a document, generally referred to as Articles of Incorporation with the state and pay filing fees.

• UpCounsel accepts only the top 5 percent of lawyers to its site.
• Once you’ve selected an original name, you must fill out and file the Articles of Incorporation form, also known as a Certificate of Incorporation, with the secretary of state’s office.
• Because a corporation exists separately from its shareholders, it has what’s called a perpetual existence.
• Expensive to form compared with other structures, like LLCs or sole proprietorships, due to the level of legal complexity, which will likely involve hiring a tax professional and one lawyers.
• It’s the most common type of corporation in the U.S. – and with good reason.
• This strategy is geared toward companies that intend to scale quickly and plan to hold onto the business for many years without withdrawing dividends.

A corporation cannot select a “C” or “S” designation at the state level. After incorporation, the company shall remain a C-Corporation or make the “S-election” on IRS Form 2553 with the IRS within 75 days after incorporating. Upon formation, https://www.bookstime.com/ all for-profit stock Corporations are General Corporations and by default they are classified by the IRS as a C-Corporation for tax purposes. Some business owners may wish to remain a C-Corp, while others may want to become an S-corp.

How to Make the C Corporation Election

As a business owner, you have many options for paying yourself, but each comes with tax implications. LLCs and S corporations are different aspects of business operations, but are not mutually exclusive.

• The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits.
• The resident agent is the person responsible for a summons or petition in any lawsuits brought against the business.
• This means a C corporation pays corporate income tax on its income, after offsetting income with losses, deductions, and credits.
• In addition, the C-Corp does not need to issue the total number of authorized shares; the Board of Directors can decide to hold some back in case more owners are added in the future.

Consultants at our Small Business Assistance Office can help you understand more about S and C corporations or other types of business organizations. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide. What’s the difference between an “S” corporation and a “C” corporation? There are no restrictions on ownership in a C corporation – you can have as many owners as you want, and foreign nationals can own shares in a C corporation.

Credit, Subtraction, & Deduction Forms

Most states require very little paperwork to form and maintain a partnership. This point alone is the reason many small companies are organized as partnerships. Debt refers to the money borrowed from banks, shareholders, and creditors. The IRS closely monitors a corporation’s debt in order to ensure that it’s within appropriate limits and that the corporation pays adequate interest on it. A corporation issues stocks in return for the equity invested by the owners.

Both are corporations with charters granted by the state of organization. You can organize in Nevada for the best asset protection laws, for example, and qualify to do business in California. In that case, you will have one corporation paying annual fees in two states . While we like and often use S Corporations, we keenly appreciate the advantages of C Corporations.

S Corp vs C Corp

Forming and running your small business like major US corporations can, at first, seem like a daunting undertaking, with tangled corporate regulations, checklists, and deadlines. S corps also require special documentation to be filed with the IRS, whereas C corps are generally recognized as the default corporate structure in most states. Blank paper share certificates can be purchased at office supply stores or online. These certificates indicate the percentage of the corporation the holder owns. The number of shareholders is important here—C corps with fewer than 35 do not need to register shares with the US Securities and Exchange Commission.

Railroads, telephone companies, pipeline companies, airlines, and shipping lines use special apportionment methods. C Corporations must pay an annual License Fee which is 0.1% of capital and paid in surplus plus $15. The License Fee is payable by the original due date for filing the Income Tax return or request for extension and applies to the tax year following the Income Tax year. The Income Tax and License Fee are reported on Form SC1120. Corporations transacting or conducting business within South Carolina are required to file a corporate tax return. Domestic corporations must submit the „Articles of Incorporation“ and related documents to the Secretary of State. Foreign corporations must submit an Application for a „Certificate of Authority to Transact Business in South Carolina“ and related documents to the Secretary of State.

Is C Corporation Your Best Option Under the New Tax Law?

Once formed, a corporation has a life of its own, with its own rights, capabilities, responsibilities, and liabilities. It can buy, own, and use its own real or personal property, make its own contracts and guarantees, lend money and invest funds. Keep in mind that some states also require you to file a state-level S corporation election after incorporating your business. Incorporate.com can assist you with all of your internal documentation needs.

• To qualify to make the S corporation election, the corporation’s shares must be held by resident or citizen individuals or certain qualifying trusts.
• For S Corporations contemplating a move to C status, the issue of payroll taxes can be a big deterrent.
• Each owner’s K-1 amount is then reported and taxed on their personal tax return – Form 1040.
• A Registered Agent receives and forwards important legal documents and state correspondence on behalf of the business.
• A corporation is a company or group acting as a single entity and has shareholders, directors and officers working in association.
• In order to establish an LLC, instead of filing Articles of Incorporation like a corporation, LLC founders must file Articles of Organization with whatever state agency manages business registration.

His “double taxation” can be avoided by electing S corp status for your corporation. An S corp. is treated similar to a sole proprietorship or a partnership.