C-Corporation Tax Election IRS Form 8832

Like partnerships, an S corporation must always file its annual federal tax return by the fifteenth day of the third month following the end of the tax year, generally March 15. The income is then passed down to its members individual returns, which adhere to the normal April Tax Day. This double taxation makes C corporations the highest-taxed form https://accounting-services.net/can-a-virtual-assistant-do-your-bookkeeping/ of business. However, in a C Corp, profits in the form of dividends are strictly distributed based on the percentage of each shareholder’s stock ownership. This type of structure can have an unlimited number of owners and multiple classes of stock. Some advantages of a C Corp are its continuity of existence and protection of shareholders’ assets.

To the consumer, incorporating your business means that you anticipate growth for your company and are committed to seeing that growth come to fruition. This can give you more credibility both with customers and potential investors. Because of the important tax and legal implications, it’s often well worth the cost to consult with an attorney or tax expert for advice on the best business structure for your needs and goals. Whereas personal liability is when a business owner’s assets can be used to satisfy any business debts. When you sign a contract or do business as yourself, which is the default if you start a business and don’t register, you are personally liable for anything that goes wrong.

Reserve the business name with the Secretary of State, if possible.

This is when courts put aside limited liability and hold a company’s shareholders personally liable for the corporation’s actions or debts. Every state requires different fees to start and maintain a business. You may be able to file the registration paperwork on your own, but many people choose to hire a lawyer to ensure the business is created correctly and stays in compliance with local, state, and federal laws. Because every business and business owner is unique, it may be worthwhile to consult with a legal or tax professional for advice on choosing the best business structure for your long-term goals. It’s like paying out all the remaining undistributed profits to yourself and shareholders.

It’s a big deal because owners of a pass-through entity pay personal income tax on the profits of the company, but the owners can then withdraw those profits as tax-free dividends from the company. No one willingly signs up to be taxed twice so at a superficial glance, you can see why so many professionals will discourage you from choosing a C-corp when starting a business. As it is, your company and you as an individual are subject to many types of taxes, the most notable are payroll taxes, income taxes, taxes on dividends, and potential early distribution taxes from your 401(k). Because each of these taxes have their own rates, rules, and triggers, you and your business can actually be taxed many times over in different ways. Thus, the amount of taxes you owe is less of a function of how many times you are taxed and more a function of the rates of taxation and the type of tax you are paying. Double taxation occurs when a C-corp generates a profit for the year AND distributes that profit to shareholders in the form of a dividend.

Zeroing Out Corporate Taxable Income with Compensation Paid to Shareholder-Employees Is Not Foolproof

If the corporation is a qualified small business corporation (QSBC), the 100% gain exclusion may be available for stock sale gains. If so, the maximum combined effective federal income tax rate on the venture’s profits can be as low as 21%. Ask your HK tax advisor if your venture is eligible for QSBC status. For a pass-through 8 Best Accounting Software for the Self-Employed in 2023 entity that pays out all of its profits to its owners, the maximum effective federal income tax rate on the venture’s profits is 40.8%. That equals the highest federal income tax rate for individuals (37%), plus 3.8% for the NIIT or 3.8% for the Medicare tax portion of the self-employment (SE) tax (whichever applies).

Shareholders then pay taxes on personal income for any gains realized from dividends paid by the C-corp or on gains made from sale of C-corp stock. This system is referred to as “double taxation” and has traditionally been viewed as the cost of the corporation’s limited liability advantages. Today, businesses can also achieve limited liability through LLC formation or election of S-corp status. In terms of tax implications, sole proprietorships are considered a “pass-through entity.” Also known as a “flow-through entity” or “fiscally transparent entity,” this means that the business itself pays no taxes. Profits pass through to owners who pay them in their personal returns under ordinary income tax rates on the typical Tax Day, usually April 15. Other business entity types don’t have to deal with the double taxation dilemma, unlike what C Corporations are dealing with.

S corp vs. LLC

Importantly, in most cases, the profits are subject both to federal income tax and Social Security and Medicare tax (hereafter “FICA” tax). FICA tax (as of 2018) is 15.3% of income up to the Social Security limit of $128,400 and 2.9% of income earned beyond that. Each entity type is subject to specific federal tax laws that apply to all US companies of that type, regardless of the state of registration.

This article will cover the potential tax implications of running your business as a C corporation. Luckily, we made this handy chart for you to reference and quickly find must-know information about single vs. double taxation. There are upsides and downsides to both pass-through and double taxation.