When forming a company, business owners have several options when it comes to the type of business entity. Each type has advantages and disadvantages that include financial, legal, and tax considerations. One option is called a C corporation, also known as C corp.
C corporations are considered legal entities owned by their shareholders and operated by their board of directors. The C corporation pays bills, earns income, pays tax, and is legally liable for any debt incurred by the business. The shareholders or owners of the C corporation are viewed as separate entities, and their personal assets are usually protected.
Because of the additional cost, paperwork and compliance issues associated with this type of business entity, C corporations are generally of interest to large companies. Small businesses may find the recordkeeping and regulations burdensome, especially when weighed against the potential benefits of this election. This type of entity is formed by filing Articles of Incorporation with the Secretary of State where the business is located. All corporations are considered C corps by the Internal Revenue Service (IRS) unless forms are filed to state otherwise. In order to make an S corporation election, the business owner will file Form 2553, Election by a Small Business Corporation, and Form 8832, Entity Classification Election.
Double taxation is something to consider when opting to file as an C corporation. Since C corps can realize a profit or a loss, they are taxed on the profits earned. Profits are paid out to the shareholders as dividends, which are also taxed. This is referred to as double taxation, since taxes are involved at both the corporate and personal level.
The corporation is not allowed to claim distributed dividends as tax deductions, and the shareholders cannot deduct a loss generated by the C corporation on their personal tax return. C corporations will file Form 1120, the “U.S. Corporation Income Tax Return” annually with the IRS to report business transactions.