Entity Description

A corporation is a business entity that carries its own legal status, separate and distinct from its owners.  A corporation cannot elect out of of corporate taxation and must choose to operate under one of two tax structures – as an S Corporation or C Corporation.

C Corporation Tax Election

A C corporation pays tax on it profits.  When shareholders take profits from the corporation, the distributions are usually taxable dividends (double taxation).

Wages & Self Employment Tax

Shareholders who perform services for a corporation, including officers, are treated as employees.  Wages of corporate employees are subject to payroll tax and withholding.  Wages paid to employee-shareholders must be reasonable.  Dividend distributions are not subject to self employment tax.

Business Losses

Capital losses are allowed only to the extent of capital gains.  Net operating loss of a corporation is carried back or forward against corporate income, but is not passed through to shareholders.

Bookkeeping & Accounting

The balance sheet on a corporation’s income tax return must agree with the corporate books.  A corporation must use a double-entry bookkeeping system.  It must file all the necessary employment and income tax returns.

Transfer of Ownership

Ownership is easily transferred by selling shares of stock.  The corporate charter may place restrictions on the sale of stock.

C Corporation tax election considerations include the character of the business entity, and the advantages and disadvantages inherent in the type of entity.

Business Advantages

  • Limited liability
  • Perpetual life
  • Ability to raise capital through issuance of stock
  • Ease of transfer of ownership

Business Disadvantages

  • Double taxation of profits
  • Corporate charter restricts types of business activities
  • Subject to various state and federal controls

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