C corporation

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search

A C corporation, under United States federal income tax law, is any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Many companies, including most major corporations, are treated as C corporations for U.S. federal income tax purposes. C corporations and S corporations both enjoy limited liability, but only C corporations are subject to corporate income taxation.[1]

C corporation vs. S corporation[edit]

Generally, all for-profit corporations are automatically classified as a C corporation unless the corporation elects the option to treat the corporation as a flow-through entity known as an S corporation. An S corporation is not itself subject to income tax; rather, shareholders of the S corporation are subject to tax on their pro rata shares of income based on their shareholdings.[2] To qualify to make the S corporation election, the corporation's shares must be held by resident or citizen individuals or certain qualifying trusts. A corporation may qualify as a C corporation without regard to any limit on the number of shareholders, foreign or domestic.

Forming a corporation[edit]

In the United States, corporations are formed under laws of a state or the District of Columbia. Procedures vary widely by state. Some states allow formation of corporations through electronic filing on the state's web site.[3] All states require payment of a fee (often under USD200) upon incorporation.[4] Corporations are issued a "certificate of incorporation" by most states upon formation. Most state corporate laws require that the basic governing instrument be either the certificate of incorporation or formal articles of incorporation. Many corporations also adopt additional governing rules known as bylaws. Most state laws require at least one director and at least two officers, all of whom may be the same person. Generally there are no residency requirements for officers or directors. However, foreign aliens have to form corporations via registered agents in many states as an obligation.[5]

Financial statements[edit]

Corporations are required to issue financial statements in the United States. Financial statements may be presented on any comprehensive basis, including an income tax basis. There is no requirement for appointment of auditors, unless the corporation is publicly traded and thus subject to the requirements of the Sarbanes–Oxley Act.

Distributions[edit]

Any distribution from the earnings and profits of a C corporation is treated as a dividend for U.S. income tax purposes.[6] "Earnings and profits" is a tax law concept similar to the financial accounting concept of retained earnings.[7] Exceptions apply to treat certain distributions as made in exchange for stock rather than as dividends. Such exceptions include distributions in complete termination of a shareholder's interest[8] and distributions in liquidation of the corporation.[9]

Tax rates[edit]

The corporate tax rate is a flat 21% starting January 1, 2018 after the passage of the Tax Cuts and Jobs Act of 2017, on December 20, 2017.[10]

Taxable income ($) Tax rate[11]
$1 and beyond 21%

Up through 2017, the Internal Revenue Service (IRS) imposed tax based on the following schedule for "most corporations", except "qualified personal service corporations" and certain other cases:[12]

Taxable Income ($) Tax Rate Of amount over
Over But not over
$0 $50,000 15% $0
50,000 75,000 $7,500 + 25% 50,000
75,000 100,000 13,750 + 34% 75,000
100,000 335,000 22,250 + 39% 100,000
335,000 10,000,000 113,900 + 34% 335,000
10,000,000 15,000,000 3,400,000 + 35% 10,000,000
15,000,000 18,333,333 5,150,000 + 38% 15,000,000
18,333,333 35% 0

See IRS Publication 542, Corporations for details about taxation of corporations.

Notes and references[edit]

  1. ^ "Some S corporations may want to convert to C corporations". IRS. Internal Revenue Service. 20 November 2018. Retrieved 8 March 2019.
  2. ^ 26 USC 1361-1368..
  3. ^ See, e.g., New Jersey registration Archived August 12, 2011, at the Wayback Machine.
  4. ^ See, e.g., Delaware fee schedule.
  5. ^ "Delaware Code, Title 8". State of Delaware.
  6. ^ 26 USC 301.
  7. ^ 26 USC 312.
  8. ^ 26 USC 302.
  9. ^ 26 USC 331-346.
  10. ^ Bryan, Bob (2017-12-14). "Republicans have a final deal on their tax bill — here's what's in it". Business Insider. Retrieved 2018-02-05.
  11. ^ Form 1120 Instructions for 2016 page 17
  12. ^ "Publication 542" (PDF). Department of the Treasury, Internal Revenue Service. February 2006. Retrieved 2010-08-26.

See also[edit]