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C Corporation

Small Business corporations are classified for tax purposes as either C or S Corporation. A corporation shields the personal liability for the individual and this benefit many times is a good reason to start a corporation.
Some states like Delaware and Nevada have very low incorporation fees but keep in mind that California charges the same fees for qualifying as an out-of-state corporation as it does for creating a California corporation, therefore it is not advisable for California resident to form a Delaware corporation.

Profits of C Corporation

A C Corporation can own property, enter into contracts, borrow money, and sue and be sued just like a person. In addition a C corporation must pay income tax on the profits at the corporate rate.
Any profits that are distributed to shareholders via dividends are then taxed again in the hands of the shareholders at their individual income tax rate. This amounts to double taxation, with the same profits taxed at both the corporate and personal level. In the real world, however small C corporations can easily avoid paying income tax by paying salaries and/or fringe benefits to its shareholders.

Operating Loss and Retained Earnings

Individual share holders can't claim operating losses of a C corporation business. Instead losses on the corporation's books in one year can be offset against future or past years corporate profits.
C corporation profits kept in the business are taxed at an initial tax rate of 21%. Retaining earnings at a lower tax cost is an advantage that growing small C corporations have over other entities.

Tax Reporting

C corporations must file annual federal tax returns regardless of whether they have any income or not. California corporations need to file state tax returns as well and need to pay a minimum annual franchise tax of $800 even if the corporation loses money.

At Kyrish C.P.A. Inc., Sunita Jagasia is a Certified Public Accountant with many years of experience filing corporate taxes. Corporation taxes are tricky and should always be professionally prepared.

  • Always prepare corporate minutes or resolutions of corporate financial transactions like loans, compensation of officers etc. IRS auditors often inspect corporate records

  • If you haven't kept up your corporate paperwork then IRS could disallow some of the tax benefits that a C Corporation receives

  • There is a special penalty tax called Personal Holding Company Tax for C Corporation that earn most of their income from investments, such as dividends and royalties

  • If a C corporation keeps too much profit in its coffers it incurs an accumulated earnings tax so keep this into account while leaving money in the corporation

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