Upon formation, 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.
What Is a C-Corporation?
C-Corporation is the default tax status of all Corporations. A C-Corporation may carry its losses forward from one tax year to the next. People often think of the C-corporation as being subject to “double taxation” which is true. However, even with double taxation, there are many options to reduce one’s taxes.
It is important to distinguish the federal “tax election” from the default state filing. 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.
C Corporation vs. S Corporation
The alternative to a C-Corporation is an S-Corporation. In the S-Corporation, profits and losses pass through the corporation to avoid double taxation on corporate income. To become an S-Corporation, all stockholders must be domestic individuals (citizens or green card holders), have less than 100 shareholders that satisfy certain requirements, and only have one class of stock (or it can have 2 classes where the only difference is voting or non-voting)
. Some corporations are ineligible, such as financial institutions, insurance companies, and domestic international sales corporations. You should submit a Form 2553 signed by all shareholders in order to elect S-Corporation treatment. (LLCs, which start as sole proprietorships or partnerships, under “check the box” regulations can also make this “S” election or even a “C” election to be taxed as a corporation while maintaining the LLC structure for internal purposes).
Is a Non-Profit a C Corporation?
No, a Non-Profit is not the same as a C-Corporation. Non-Profit Corporations do share several similarities with a C-Corporation. Both entities have similar incorporation processes and have similar corporate documentation. A C-Corporation cannot obtain tax exempt status, however, a Non-Profit can apply for tax exemption. Non-Profits are generally formed for charitable, educational, religious, scientific, or other activities that are not meant to generate a profit to benefit an individual.
How to Start a C Corporation
A C-Corporation is started by filing a Certificate of Incorporation (or the equivalent) with the regulating authority in the jurisdiction that you wish to conduct business in. In the state of Delaware, you would file the Certificate of Incorporation with the Secretary of State – Division of Corporations. Once this document is filed, the corporation should create and maintain supporting documentation to establish the directors, officers and shareholders.
Are C Corporations Double Taxed?
Yes, C-Corporations are double-taxed. C-Corporation income is taxed after offsetting it with expenses, losses, and any possible deductions and credits. C-Corporations will then distribute any after-tax income to its shareholders in the form of dividends. The individual shareholder would pay income tax on the dividends they receive.
Can An LLC Be a C-Corporation?
LLCs are able to make corporate tax elections under the IRS “check the box” rules. An LLC can make a C-Corporation tax election after it has been formed.
An LLC can make the C-Corporation election on IRS form 8832. The LLC will need to file an 1120 US Corporation Income Tax Return.
LLC owners looking to make a C-Corp election should consult with a tax advisor within 75 after forming the LLC.
Who Forms a C-Corporation?
The C-Corporation entity type is found amongst some of the biggest companies in the world. The likes of Microsoft and Walmart are formed as C-Corporations. The C-Corporation can be used by companies of any size that are expecting significant growth.
The ability to issue an unlimited number of shares can be a crucial funding method for early-stage companies. Additionally, the ability to reinvest business profits at a more favorable corporate tax rate can help a company sustain growth over time.
For more information about C-Corps, visit the tax tips page.