Discover how a C-Corp gets taxed.
Establishing your company as a C-Corp gives you greater freedom than an S-Corp. To begin, you may divide shareholders into classes and assign voting rights to each class. That being stated, there will be further tax ramifications to consider.
C-Corps must first pay corporation taxes. Individual shareholders then pay taxes on dividends paid by the company. Some stockholders will face double taxes as a result of this.
The possibility of double taxation is frightening, yet it is an issue that may be avoided. Let’s have a look at how it works: For starters, a C-Corp does not pay taxes on every dollar earned. C-Corps, on the other hand, deduct their operational expenditures from their sales, lowering the company’s taxable income. Consequently, if a corporation earns $100,000 in sales but spends $65,000 on operational expenditures in a fiscal year, the company’s taxable income is $35,000, not $100,000.
Secondly, shareholders in a C-Corp only receive taxed if dividends are issued to them by the corporation. If a C-Corporation decides not to give dividends to shareholders and instead keep earnings, double taxation is avoided as no dividends exist. In other words, only if a C-Corp generates a profit and pays dividends to shareholders will double-taxation come into play.
Every C-Corps must complete and submit IRS Form 1120. This report provides the IRS with information on your C-revenue, Corp’s profits, losses, deductions, credits, and income tax liability.
If you’re not sure if a C-Corp is best for you, check our articles on how S-Corps are taxed or the distinctions between S-Corps and C-Corps.
