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).
For more information about C-Corps, visit the tax tips page.