There are many requirements in filing a federal income tax return for your small business, depending on your business structure. Each type of entity requires a different tax form and filing requirements to report your business income and expenses. This article will bring you an overview of C corporations and C corp filing requirements.
What is a C corporation?
C corporation is a form of business organization in which the owner (or shareholders) are taxed separately from the business. Shareholders are the corporation’s owners, each owning a fraction of the company. A shareholder may own a share of the stock of the corporation. C corporations raise funds by selling these shares.
The C corp entity is taxed on income earned, whereas shareholders are taxed on individual income. A C corporation pays the same tax on its revenue as a person would on their annual salary—a flat 21% on operating earnings.
Because shareholders in a C corporation are wholly separate from the corporation, income delivered to stockholders of profits or other payments is paid at the shareholders’ rates, leading to “double taxation.”
How are C corps taxed?
C corps must first pay corporate taxes. Investors then pay taxes on profits received by the corporation. This tax rule is also known as double taxation, meaning that income taxes are paid twice on the same income source. Double taxation occurs when income is taxed at both the corporate and personal levels.
Though the possibility of double taxation is frightening, there are many ways that business owners can lower the taxes. For example, C corps can deduct its operating costs from its revenues, lowering its taxable income. So, if a corporation earns $100,000 in revenue but spends $65,000 on operating expenses in a financial year, the company’s tax liability is only $35,000, not $100,000.
Furthermore, C corp owners only pay their taxes if the corporation pays them profits. So if a C corporation decides not to sell stock and retains profits instead, it can also avoid double taxation.
All C corps must file and submit Form 1120. This report provides the IRS with information on the corporation’s revenue, gains, liabilities, deductions, and income tax payable.
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C corp filing requirements that you need to know
If you decide to run your business as a C corporation, here are the critical C corp filing requirements that you must know:
- Choose a business name. Your C corp must be a legal company with a legal reputation established with the authorities. Once you have filed your business as a C corp, you mustn’t operate under another registered name.
- File a certificate of organization. Before starting your business as a C corporation, you must file a certificate of organization with the tax agency in your country or state and pay an application fee. The agency will mail you a registration article once you have correctly registered.
- Get an Employer Identification Number (EIN) and banking information. The IRS will only issue companies with an Employer Identification Number (EIN) and a commercial bank account.
- Make a business agreement. Each entity level has different operating rules and regulations. A C corp’s rules identify its shareholders, restrict the number of shareholders, and establish financial distribution criteria.
- Have a business representative. A C corporation must have a local representative who handles legal and tax paperwork on the company’s behalf.
- Establish a board of directors. A C corporation should have an executive board of directors voted by the company’s shareholders. The board members are responsible for managing the corporation, making major business decisions, hiring, firing, managing officers, etc.
- Give out stock certificates. Shareholders are C corp owners, and they should be issued company shares indicating their ownership position in the corporation.
It’s also important to keep up with changes in tax rules and regulations, which can occur at any level. This can be particularly challenging if your company has multiple locations in different states, requiring you to follow tax rules in each jurisdiction.
The bottom line
A C corporation is the right corporate type for your company if you want to attract many investors, work with international partners, or sell internationally. If you choose to file your business as a corporation, it’s extremely important to be aware of C corp filing requirements, keep yourself updated on the tax rules and tax changes, and keep in hand the most suitable accounting tools to help your business prepare and file taxes accurately.
Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.