Everything You Need to Know About Your C Corporation

The legal entity type you select will have significant tax implications for you and your small business. That's why it's so important to understand the strengths and weaknesses of each entity before making a selection.

In this blog, we'll tell you everything you need to know about C corporations, including what it is, the steps you would take to form a C corp, the benefits of that entity type for your small business, potential downsides, and more. 

What is a C Corporation?

You may have heard of partnerships or a limited liability company and their tax advantages, but a C corp is a different type of corporation.

A C corporation is a type of corporate structure taxed separately from its owners and shareholders. While other entities, such as S corporation, share similarities, there are some key differences between the two entities.

S corporation or C corporation business structure? Here are the differences, including the taxation of a C corporation, that you should know about when evaluating a C corp vs. S corp: 

C corp taxes are applied at both the corporate income tax and personal income tax levels, called double taxation, while S corporations pay taxes at an individual level.

C corporations must issue stock and can have an infinite number of shareholders. S corporations are limited to 100 stockholders.

C corporations are required to make quarterly estimated income tax payments, while S corporations only do it once a year.

Unlike S corporations, owners and shareholders of C corporations do not have to be U.S. citizens or residents. Other businesses rather than individuals can own C corporations.

As a C corporation, there’s no deduction for corporate losses, so shareholders cannot deduct losses on their personal tax returns.

How to Form a C Corporation 

The steps you'll take for forming your business as a C corporation are reasonably straightforward and similar to the formation process for other entities.

1. Select a business name. The name you select must be unique. You’ll want to check with your state and local business authorities to ensure no other company uses a similar or identical name.
   
2. Articles of incorporation. You’ll need to develop your business's articles of incorporation and submit them to your Secretary of State to form your business legally. It's essential to include your unique business name, address, registered agent information, and details about the type of stock you'll be issuing.
   
3. Stock. The stock highlighted in your articles of incorporation is distributed to shareholders who comprise the ownership of your business.
   
4. Employer Identification Number (EIN). An EIN, also known as a Federal Tax ID, is like a Social Security number for your business, which the IRS uses to identify you for tax purposes. If you intend to hire employees, open a business bank account, or file business taxes, you must obtain an EIN.
   
5. Board of Directors. You must establish a board of directors who will oversee your C corporation's operations. 

C Corporation Taxes

C corporations are subject to double taxation at the corporate and individual levels. The current corporate tax rate is 28%. Here's what to know about the taxation of a C corporation.

To prepare your C corporation taxes, you must use Form 1120 to report your business’s financial information, including taxable income, gains, losses, deductions, and credits. If your assets surpass $10 million and you file over 250 returns annually, you must file this form online.

C corporations must also pay employment taxes, which include FICA (Social Security and Medicare) and unemployment taxes. You must use Forms 940 and 941 to report these taxes.

Sections you'll need to complete in Form 1120:

Basic Information About Your C corporation: This consists of your business’s legal name, address, EIN, date of incorporation, and total assets.

Corporate Income: This is your gross receipts or sales, returns and allowances, cost of goods sold, gross profit, dividends, interest, gross rents, gross royalties, and capital gains.

Tax-Deductible Expenses: These expenses include advertising, charitable contributions, repairs and maintenance, employee benefit programs, etc. You do not need to attach documentation, but keep your records in case of an IRS audit.

Tax, Refundable Credits, and Payments: This section aims to determine if you need to receive a tax refund or owe taxes to the IRS.

Schedule A – Cost of Goods Sold: If your business deducts the cost of goods from gross income, you must report this information in this section.

Schedule C – Dividends and Special Deductions: If dividends or special deductions have been claimed, you must record this information here.

Schedule E – Compensation of Officers: Document the compensation amounts of your corporate officers in this section.

Schedules J and K: These sections indicate your business's accounting method and information that can affect your corporate tax rate.

Schedules L, M-1, and M-2: In these sections, you need to attach your business’s balance sheet, document the reconciliation of income loss, and analyze unappropriated retained earnings.

Benefits of forming a C Corporation

There are numerous advantages of a C corporation,  including the following popular features. 

Limited liability protection 

C corporation shareholders/owners enjoy limited liability protection, which protects their personal assets. This means they aren't personally responsible for their C corporation's liabilities and debt. 

Unlimited number of shareholders

Unlike S corporations, which must limit their shareholders, C corporations can offer shares to an unlimited number of shareholders, including both private individuals and public entities. 

Perpetual existence

C corporations feature perpetual existence, meaning they will continue to exist even after ownership departs. 

Increased credibility 

C corporations often have greater credibility than other entities in the eyes of third parties, including suppliers, vendors, and potential investors.  

Potential downsides 

If your business would benefit from forming as a C corporation, there aren't many downsides. However, two issues often give prospective C corporation ownership pause. 

C corp double taxation. C corporations are subject to double taxation at the corporate and individual levels. This differs from other business entity types, where ownership is only taxed on the individual level.

Complex. It is much more challenging to run a C corporation than other entities. There are many more requirements to comply with as a C corporation, while entities such as sole proprietorships or single-owner LLCs are less formal.  

Role of Shareholders, Directors, and Officers in a C Corporation

While these roles are unique in certain ways, they might also intersect. For instance, a person appointed to a director role might also own shares in the corporation.

Shareholders are the owners of the corporation and appoint directors. Directors are typically appointed to oversee management and will appoint officers. Officers are usually involved in the day-to-day happenings of the corporation. 

Partner with C Corporation Experts to ensure a path to success

Complying with the various C corp requirements can be difficult. That's why so many small business owners and entrepreneurs trust 1-800Accountant, America's leading virtual accounting firm for small businesses, for their corporate needs.

Whether it's C corp formation, tax advisory, or any of our professional accounting services, we have the affordable solution you need to help your C corporation stay compliant. Schedule a quick consultation – usually 30 minutes or less – to learn how we can help.