Anyone planning to start and incorporate a business must carefully consider the tax implications of the decision on how to structure the business. Of course, it would not be wise to select a business structure solely based on tax considerations. Still, the tax impacts of such a decision should never be neglected.
Each form of business – a C corp, an S corp, an LLC, or partnership has its advantages and disadvantages. Therefore, setting up a C corporation in California must be carefully measured prior to such a decision. It should be based on the type of business the owner wants to operate, the risks it entails, the corporate structure, and the corporate or venture capital investors they intend to attract.
Do C corps pay taxes?
C corporations are usually more complex to operate than LLCs or other types of S corporations. Shareholder and director meetings must be held, and the bookkeeping and record requirements are more strict. C corporations are faced with relatively strict formalities. They are under more government scrutiny and are subject to fairly complex rules closely monitored by tax authorities.
C corporations pay their corporate income taxes at the corporation level, on the basis of their income and profits from which several forms of deductions related to expenses are offset. Therefore, a C corporation pays its corporate taxes, which is not the case with S corporations or LLCs. S corporations and LLCs are flow-through entities that escape double taxation. C corporations are not flow-through entities, and it’s why they are ultimately subject to double taxation.
Still, C corps have the widest range of deductions and expenses allowed by the IRS. They offer multiple tax planning opportunities with advantages to the shareholders, the corporation itself, and its business and further development.
How do I do C corp taxes?
The corporation pays its shareholders dividends from its after-tax income. The shareholders are then obliged to file for and pay their income taxes on the dividends, which means that the corporation and its shareholders are subject to some form of double taxation. It is worth noting that shareholders are not entitled to a tax deduction on their personal tax returns based on corporate losses since these are dealt with at the corporation level.
Although the prospect of company taxation and double taxation may look daunting, the incorporation of a business through a C corporation offers advantages and access to tax strategies otherwise unavailable. Tax advisors can produce advice on restructuring, eliminating, or substantially reducing this double taxation, provided necessary conditions have been met.
A C Corp doesn’t pay taxes on every dollar it earns. They deduct their operating expenses from their revenues, reducing the business’s taxable income. Secondly, shareholders in a C-Corp only get taxed if dividends are distributed to them by the company. So, if a C Corporation chooses not to provide dividends to shareholders and instead retain profits, double taxation is avoided since no dividends exist.
Who can assist me with setting up a C corporation in California?
If you are ready to set up your C Corp, we can help. At David York’s Tax Service, we specialize in all-encompassing solutions for San Diego County businesses: from payroll and bookkeeping to business incorporation services and individual and corporate tax preparation.
Our team will assist you in developing a clearer understanding of all the aspects involving your taxes, as you work towards building your business, brand, and client base. Don’t hesitate to give us a call, schedule your consultation today!