C Corp California: Everything You Need to Know
A C corp California is a standard corporation that was formed in California and has not opted to be treated as an S corporation by filing IRS Form 2553.3 min read
A C corp California is a standard corporation that was formed in California and has not opted to be treated as an S corporation by filing IRS Form 2553. This tax election is the primary difference between a C and S corporation. Both types of corporations provide shareholders with personal asset protection. This means that individual liability for business debts and obligations is limited to each shareholder's investment in the business.
Federal C Corp Taxation
C corporations are considered a separate federal entity for tax purposes and thus subject to corporate income tax. When dividends are distributed to shareholders, these funds will be taxed again at the individual level. This situation, known as double taxation, can be avoided by opting for the pass-through taxation of an S corporation. This allows the corporation to avoid federal tax at the corporate level since income and losses pass through to each individual shareholder, where they are taxed once at the lower individual level.
An S corporation does not pay federal income taxes at the corporate level but is required to file an annual informational return along with a Schedule K-1 for each shareholder that reports his or her individual percentage of profits and losses.
C corporation shareholders may not offset other income by reporting business losses on their individual returns. S corporation shareholders can report these losses up to the amount of their adjusted original investment in the company (stock basis).
Both types of corporation's shareholders are subject to personal income tax on salaries, dividends, and/or earnings they receive from the company.
At tax time, C corporations file Form 1120 with the IRS, and are taxed at a rate of 15 percent on the first $50,000 in net profits or retained earnings and at a rate of 25 percent on net income and/or retained earnings over $50,000.
Both types of corporations can offer employee benefits such as health insurance and deduct the cost of these benefits from their federal income taxes. However, this is less of an advantage for S corp shareholders that own 2 percent or more of the company's stock.
It is easier for a C corporation to grow its capital than it is for an S corporation. That's because the corporate tax rate is usually lower than the individual rate and because profits that are retained within the corporation are not distributed as dividends and double taxed. Although an S corp can retain profits, on paper they must be distributed to shareholders, who will owe taxes even if they did not receive these dividends. This issue is sometimes called phantom income.
While a C corporation has no ownership restrictions, every shareholder of an S corporation must be a U.S. citizen or resident or a specific type of estate or trust. In addition, C corporations can issue multiple stock classes to attract investors while S corporations can only issue one class of stock with different voting rights. For this reason, C corporations are often the better structure for large corporations that eventually plan to be publicly traded or sold.
A C corporation can participate in most types of business, while the business activities of S corporations are restricted. S corporations cannot be:
- Insurance companies
- Domestic international sales corporations (DISCs)
- Certain groups of affiliated corporations
Fiscal Year and Accounting Considerations
A C corporation can decide when its fiscal year ends, but in most cases, an S corporation must follow the calendar year and end its tax year on December 31. A C corp that converts to an S corp must adjust its fiscal year to end on December 31 and may not change the dates again if S corp status is revoked. A C corporation with less than $5 million in gross receipts is considered a small corporation and must use the accrual method of accounting. S corporations may use the cash method of accounting but must use the accrual method if they have inventory.
C and S corporations share the same structure. Both are owned by shareholders, who appoint a board of directors to oversee big-picture decisions. This board elects officers who manage the business's everyday operations.
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