A C corporation is a standard corporation. It is a taxpaying entity which is separate from its owners, meaning it is its own legal entity. To form a C corporation, the business must be incorporated in some state. The corporation does not need to be incorporated in the state in which the business is operating. Due to favorable corporate taxation laws, many businesses choose to incorporate in Delaware or Nevada. The law of the state in which the business operates may still have a requirement that the business make some sort of formal notification that it is conducting business in the state. Also, the corporation would most likely be liable for state income tax for income earned in that state.
The C corporation is required to file Form 1120, U.S. Corporation Income Tax Return to report its income or loss. If the corporation has gross receipts of less than $500,000, it would file Form 1120-A, U.S. Corporation Short-Form Income Tax Return. Any distributions made by the corporation to the shareholders are treated as personal items of the shareholders. If the shareholder receives a salary from the corporation, the salary is deducted as an expense on the corporation’s tax return, and the shareholder reports the salary as income on their income tax return.
A C corporation is subject to what is referred to as double taxation in the case of dividends to shareholders. When the corporation distributes a dividend to the shareholders, the shareholder reports it as income on their tax return. The corporation is not allowed to take a deduction for the dividend distribution. This means that the earnings of the corporation are taxed to the corporation, and when they distribute a portion of the earnings to the shareholders, they are taxed again.
When deciding on the type of business entity to use for your business, you should consider your estimated income or loss for when the business is getting started. If you anticipate a loss for the first year or two, you should consider a pass-through entity rather than a C corporation. A pass-through entity will pass the loss through to the individuals to claim on their tax returns. A C corporation would not have this benefit.
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