C CORPORATION TAX RETURNS
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c corp tax returns
Although C Corporations are seemingly less prevalent in today’s tax landscape, there are still circumstances in which it makes financial sense to incorporate your business. Savvy & Suite will provide guidance on choice of entity, including an analysis on the comparison between S Corp versus C Corp. Should it suit your business, our professionals will create a checklist of necessary steps to start your corporation off on the right foot, including how to incorporate yourself.
Before we get to C Corporations, an additional area of clarification are the differences between a company versus a corporation. All corporations are classified as companies, but not all companies can be classified as corporations. Arguably the most common company is the Limited Liability Company, which functions as its own unique tax entity separate from the C Corporation tax entity. Likewise, the individuals that make up each entity differ. C Corporation owners are classified as shareholders, while LLC owners are designated as members. Both structures serve as liability shields, protecting the owners’ personal assets from liability in many cases.
When you think of C Corporations, one of the first things you may think of is double taxation. This is certainly a correct thought and needs to be considered when discussing your plans and goals, specifically related to getting cash out of the business. While the phrase double taxation functions as a C Corp buzzword, what does the term really mean?
Unlike pass-through entities whose business profits are not taxed at the business level (instead “flowing through” to the shareholders’/members’ individual income tax returns), C Corporations are taxed at the entity level, truly instituting a corporate income tax at the business entity level. Historically in the United States, C Corp tax rates were amongst the highest rates in the world; however, with new legislation recently passed, C Corp tax rates have decreased significantly, allowing C Corps to be more competitive in the United States when it comes to comparing rates. This tax paid on the profits of the business at the C Corp level serves as the first layer of taxation.
A profitable C Corporation will likely want to distribute some of these hard-earned profits to their shareholders, most likely in the form of dividends. These dividends cause the second layer of taxation, as they are recognized as income on the individual tax return of the shareholder that received these dividends. This dividend income is taxed at the shareholder’s personal income tax rates, which constitutes the second layer of taxation.
Because of this double layer of taxation, C Corps should understand their goals and align those goals with entity structure. As a result of the lowered corporate income tax rates, it may make sense for businesses who elect to retain cash (not pay out dividends to shareholders) to pursue a growth model while as a C Corp, reaping the benefit of a low corporate tax rate. These types of planning goals can be a flow of ideas between a business and our corporate tax team here at Savvy & Suite.
This double taxation problem is why choice of entity analysis is so important. It is vital to understand the difference in tax rates (both entity and individual) and the location of taxation (whether at the entity level or personal level). Although the C Corp tax rate may seem lower than the individual tax rates, there are unique deductions associated with various other types of flow-through entities that are not applicable to C Corps; this rate analysis compares your effective tax rate instead of just looking at the percentage rate on its face. We’ll provide our modelling, giving you facts to base your entity classification choice instead of just your feelings. Without carefully considering all alternatives, you may elect to be taxed as an entity that has adverse tax effects, impacting your bottom line and causing you to pay more tax than needed. It’s easy to see how poor planning up front can cost your business money in the long haul, which is why the conversation needs to occur.
C Corporations are also able to be publicly traded; think the major players on the stock market. These companies are all C Corporations (there are unique circumstances where partnerships can be publicly traded), with their shares being bought and sold daily. Often, these shares entitle the holder to potential dividends in the future. However, as you start your C Corporation, it may behoove you to focus on your individual planning goals instead of comparing your company to the large publicly traded counterparts. Because your C Corp is most likely privately held, Savvy & Suite can offer unique perspectives to aid in the growth and sustainability of your business; if there’s a future potential for your shares being traded publicly, that means you’ve done exceptionally well! We hope that you’re able to get to that point, with our expertise hopefully playing a role in getting you to this tremendous milestone. Until that moment, we’d be honored to serve as your trusted advisor.
These are just some examples of areas of concern when establishing or looking to establish a C Corporation as your business entity. Entity classification planning is vital, potentially saving money over the long-term; it’s important, however, to determine what your goals are and apply the entity choice that fits the goals most closely. Comparing and contrasting entity choice is an exercise Savvy & Suite has extensive experience performing and will provide immediate benefit for your business. Double taxation, unique to C Corps, could discourage you from electing this tax entity structure. The most famous C Corps are publicly traded, but it’s important to frame your C Corp in its own light, staying true to the goals of your business. Do you have additional questions that were not outlined? Our corporate tax team can answer any outstanding questions in a way that will make you feel confident about knowledge gained. After but a single conversation with your dedicated professional, you will feel well-versed in the tax landscape associated with C Corporations.