A corporation is a separate legal and tax entity from the owners/shareholders. The corporation is taxed once at the entity level and once at the shareholder level. Therefore there is double taxation.
Advantages of a C Corporation:
A Large pool of capital availability: There is a large pool of capital available for all the shareholders.
Shareholder limited liability: Shareholders are not personally liable for the debts of the corporation.
Perpetual existence: As C Corporation is separate from owners, it is a separate legal entity independent from its owners. It can live indefinitely, so the corporation is not required to be dissolved if one of the owners dies or decides to leave.
Easy transfer of shares: As the business will not cease after owner leaves, there are few restrictions on transfers. Many public corporations and Fortune 500 companies are C Corporations.
Disadvantages of a C Corporation
Ongoing compliance and paperwork: Corporations must draft articles of incorporation and bylaws. A new corporation is also required to draft bylaws that establish and appoint the board of directors.
Double taxation. The profits of the corporation are taxed once at the corporate level, and once at the shareholder level if dividends are distributed.
Complex and expensive – the C Corporations have complex legal and tax compliances as compared to other forms. Therefore, they are expensive to maintain.
How are C Corporations taxed:
A regular C Corporation is taxed as an entity separate from its owners. There is no pass through taxation similar to S Corporations.
C Corporations need to file form 1120 by April 15th of each year. They also need to report quarterly taxes based on the net profit generated during the quarter
The income earned by a corporation is taxed at the corporate level using the corporate tax rates. Below is the table showing the corporate tax rates for C Corporations.
|Tax Rates for C Corporations|
|Over||But Not Over||Tax Due|
|$0||$50,000||$0 plus 15% on amount over $0|
|$50,000||$75,000||$7,500 plus 25% on amount over $50,000|
|$75,000||$100,000||$13,750 plus 34% on amount over $75,000|
|$100,000||$335,000||$22,250 plus 39% on amount over $100,000|
|$335,000||$10,000,000||$113,900 plus 34% of amount over $335,000|
|$10,000,000||$15,000,000||$3,400,000 plus 35% of amount over $10,000,000|
|$15,000,000||$18,333,333||$5,150,000 plus 38% of amount over $15,000,000|
|$18,333,333||—||35% of amount over $18,333,333|
The tax rates for C Corporation change only when Congress passes corporate tax legislation. Unlike individual taxes, they are not indexed for inflation.
After the corporate income tax is paid on the business income, any dividend distributions to shareholders have taxed again at the shareholder level. For this reason, many corporations chose to elect S tax election.
However, good tax planning can reduce the disadvantages associated with double taxation and leverage the advantages offered by the C Corporate structure. Also, earnings can be retained and reinvested in the business. This can be a tax benefit as currently individual top tax rate is now higher as compared to the corporate rate.
Also, to note any Corporate C losses can be carried back 2 years and carried forward for 20 years.