Basics of a C Corporation

Posted: May 7, 2009 1:41 PM
Updated: May 7, 2009 1:41 PM

Real Small Business: Building Your Business

From the Editors of Real Small Business

The main difference between a C Corporation and other business structures is that a C Corporation files and pays corporate income taxes directly. This is because, C Corporations are considered a separate entity from their shareholders, and must pay taxes on income left over after business expenses.
There are a number of instances in which it is beneficial to become a C Corporation. If you plan to keep profits and other chunks of cash in the bank to finance your growth, repay debt, or make other capital expenditures, C Corporation status could make sense. This is because C Corporations can take advantage of corporate income tax rates, which are sometimes lower than personal tax rates. For profitable companies, C Corporation status has the ability provide greater flexibility in terms of planning and controlling federal income taxes. C Corporations also can deduct the cost of certain fringe benefit packages.
If you form a C Corporation, be aware that you run the risk of being taxed twice on your profits - once as a corporation, and a second time as an individual when you dispense those profits as dividends or when you liquidate the corporation. This is one of the major disadvantages of a C Corporation. Let's say, for example, your company has profits of $100,000 for one year. First, the corporation will have to pay tax on it. Then, if you parcel that money out to yourself or other owners, the IRS may treat it as dividends and will tax you as an individual. If you wait until the next year to take all or part of that money as salary, you will already have paid corporate tax on it during the year it was profit, and will then pay tax as an individual when you give it to yourself as salary.
Many tax and financial experts can come up with ways to plan for profits to avoid or limit this type of double taxation. You should speak with your accountant or tax advisor to come up with the most flexible program for your company.
Advantages
Corporate liability for shareholders 100% deduction of certain benefit packages Greater flexibility for planning and controlling income taxes
Disadvantages
Requires more paperwork and is more expensive than partnership or sole proprietorship Possible "double taxation" on profits