Creating a C Corporation is more complicated than forming a limited liability company or a sole proprietorship, but there are several tax benefits your company could enjoy.
This is a brief guide for creating a C Corporation, which also is called a regular corporation. Please consult financial and tax advisers for more detailed information.
Definition of a C Corporation?
A C Corporation:
Setting up a C Corporation
A C Corporation is established with state authorities and must abide by corporate laws in the state where it is incorporated. Experts recommend that small-business owners establish corporations in their home states. Check which agency handles this in your state. The secretary of state's office often registers corporations.
To form a C Corporation, you will need to register your business name, file a certificate of incorporation or articles of incorporation and pay a fee. You will also need to draft corporate bylaws and hold a board of director's meeting.
Advantages of a C Corporation
Limited Liability: Owners are not personally liable for the company's losses or debts. Their investments in the company are their only financial risk.
Tax Benefits: There are a number of tax benefits for a C Corporation. Depending on your business income, creating a C Corporation could lower your tax rate.
A C Corporation is the only business structure that is not a pass-through entity, which means your net income is taxed at the corporate level before it is distributed to the owners or shareholders, who must also pay tax on the income.
Small-business owners creating a C Corporation will have to file one of two forms with the IRS – one for their personal taxes, including income generated from the business, and another for their business. The business form will either be Form 1120, U.S. Corporation Income Tax Return, or Form 1120-a, U.S. Corporation Short-Form Income Tax Return.
If your corporation reports an income under $50,000, you are only taxed at 15 percent. Individuals claiming that income through an S Corporation, a limited liability company or a sole proprietorship would have to pay much higher tax rates -- $4,386 plus 25 percent of the amount over $31,850 -- on their 1040 tax forms.