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C Corporation

Corporate Compliance by Local Corporate Guides®

A C corporation is a federal tax classification available to certain businesses. Many corporations (and some LLCs) are classified by the IRS as C corps. Your tax classification determines your business’s tax and reporting requirements. As a result, choosing the best tax classification for your business is one of the most important steps you can take to maximize savings.

In our guide below, we take you step-by-step through the C corporation classification, including advantages, alternatives, and filing requirements.

Learn About C Corporations

1

What is a C corporation?

Although it sounds like a business entity, a C corporation is an IRS tax classification. When you form a corporation with the state, your business is automatically classified as a C corporation. An LLC can also file IRS Form 8832 to be classified as a C corporation.

So how does a C corp tax classification affect your business?

  • Corporate income tax
    Businesses classified as C corps file federal corporate income taxes. Most states have state-level corporate income taxes as well.
  • Double taxation
    After the business itself pays any corporate income taxes, the C corporation can make distributions to shareholders. Shareholders must then report their distributions on their personal returns. This means that distribution income is taxed twice—once at the business-level and again at the individual level.
  • Retaining income for business growth
    One advantage of a C corp is that income kept in the business doesn’t come out of shareholder pockets. In other tax classifications (such as partnerships or S corps), owners are taxed on their share of business income, even if that money is kept in the business. C corp shareholders, however, are only taxed on distributions they receive. As a result, C corps are popular for companies who hope to retain income for growth.
2

S Corp vs C Corp

Corporations are taxed as C corps by default—but they don’t have to keep that tax classification. Corporations can file paperwork with the IRS to be taxed as an S corporation instead. In many ways, S corps are similar to C corps, but there are a few key differences to take into consideration when deciding what’s best for your business.

S corporation advantages

For corporations, the biggest advantage of an S corporation election is the money that can be saved by avoiding corporate income taxes.

Unlike C corps, S corps receive pass-through taxation. Businesses with pass-through taxation don’t file regular corporate income taxes. Instead, the business’s income “passes through” the business and is reported on shareholders’ individual returns. Note that S corps do still have to file an informational return each year, much like partnerships.

S corporation disadvantages

There are some downsides to an S corp election, however. While C corps have a large degree of freedom regarding stock, shareholders, and ownership, S corps have to meet strict requirements. These requirements may make an S corp election less attractive or even impossible. For example, S corporations:

  • cannot have more than 100 shareholders
  • cannot have more than one class of stock
  • must be a domestic entity
  • cannot be domestic international sales corporations (DISCs) or certain types of banking and insurance corporations
  • are not eligible for certain tax deductions available to C corps, such as those for long-term care and disability insurance premiums

In addition, the following restrictions apply to shareholders:

  • Shareholders must pay taxes on their share of income, even if the money is retained in the business.
  • Shareholders typically must be individuals (there are some exceptions for certain trusts, single-member LLCs, estates and exempt organizations).
  • Individual shareholders must be US citizens or permanent residents.

While the tax savings can make an S corp a great choice for some companies, businesses focused on growth and raising capital may prefer a C corp. In particular, potential shareholders often prefer not to pay taxes on retained earnings and may be more easily wooed by preferred classes of stock.

Have an LLC? Check out our LLC Taxes page for tax election options or our S Corp vs LLC page to learn if an S corp election is right for you.

3

C corp tax rates

As of 2018, the federal corporate tax rate is a flat 21%. The flat rate is relatively new, resulting from the Tax Cuts and Jobs Act of 2017. Prior to 2018, corporations had a graduated rate, meaning that the rates varied for different corporate tax brackets.

Most states also require C corporations to pay state-level corporate income taxes. There are a few exceptions though. South Dakota and Wyoming don’t have corporate income taxes. Neither do several other states, like Nevada, Texas, and Washington—although these states require gross receipts taxes instead.

See the tax rate in your state on our State Tax Comparison page.

4

Corporation tax forms

Most businesses taxed as C corps will file IRS Form 1120 for their corporate income taxes. However, there are plenty of exceptions. The most common tax forms needed are included in the chart below.

It’s important to remember, however, that tax forms and requirements may change over time. Your particular business may have to use alternative or additional forms.

Businesses Taxed as C Corps

Tax Form

Domestic

Form 1120

Foreign

Form 1120-F

Tax-Exempt

Form 990, 990-EZ, 990-PF, or 990-N

Note that a handful of specific business types require alternative forms, including some insurance companies, REITs and REMICs, subchapter T cooperatives, foreign sales corporations, certain DISCs, political organizations, some HoAs, and nuclear decommissioning funds. A list of these forms can be found on page 2 of the Form 1120 Instructions.

5

Corporation tax due dates

For most C corps, tax forms are due on April 15th. However, this depends on which form you’re filing and whether you follow a fiscal or calendar year. Due dates for common tax forms are listed in the chart below.

Form

Fiscal Year Due Date

Calendar Year Due Date

Form 1120

  • 15th day of the 4th month after tax year end

  • 15th day of the 3rd month after tax year end (if fiscal year end is in June)

  • April 15th

Form 1120-F (maintains an office/place of business in the US)

  • 15th day of the 4th month after tax year end

  • 15th day of the 3rd month after tax year end (if fiscal year end is in June)

  • April 15th

Form 1120-F (does not maintain an office/place of business in the US)

  • 15th day of the 6th month after tax year end

  • June 15th

Form 990, 990-EZ, 990-PF, or 990-N

  • 15th day of the 5th month after accounting period ends

  • May 15th

6

C Corporation FAQ

Are there different types of C corporations?

Yes, there are different types of C corporations. For instance, a business designated as a C corporation might be further classified by the IRS as a personal service corporation, personal holding company, or closely-held corporation. These businesses are subject to additional rules and restrictions.

For example, a C corporation that meets the following criteria is considered a personal service corporation by the IRS:

  • The business provides a qualified service, such as accounting, engineering, architecture, consulting, actuarial science, law, performing arts, health or veterinary services.
  • 95% or more of work time is spent on providing the qualified service.
  • 20% or more of the business is owned by the professionals providing services.
  • 10% or more of outstanding stock is owned by the professionals providing services.

How does this additional classification affect taxes? Personal service corporations are subject to limitations on losses from passive activities and have restrictions for charitable contributions.

A C corporation can also be further classified as “exempt.” For example, many qualified nonprofit corporations receive federal tax-exempt status, meaning they don’t have to pay regular corporate income tax. Tax-exempt businesses file 990 tax forms instead of 1120 forms.

What’s the difference between an entity and a tax classification?

Entities are business structures (like LLCs or corporations) that are created at the state level. Tax classifications are what the IRS uses to determine how to tax businesses on the federal level. This can create some confusion because IRS tax classifications don’t match up perfectly with entity types.

For example, there is no “LLC” tax classification. The IRS taxes LLCs in a number of different ways, depending on tax election and the number of owners. There’s also no entity called “S corporation” or “C corporation.” These are just IRS names for different tax classifications.

Below are common IRS tax classifications. After each one are entity types that can qualify for that classification.

Tax Classification

Entity Type

disregarded entity

single-member LLCs

partnership

partnerships and multi-member LLCs

S corporation

LLCs and corporations

C corporation

LLCs and corporations

Ready to start an LLC or corporation? Northwest can help. In addition to offering hundreds of free business guides on our website, you can hire us to form your business and provide registered agent service, annual report service and more!

Corporate Compliance
by Local Corporate Guides®