C Corp Election: Everything You Need to Know
C corp election is an IRS classification that is usually chosen by large and medium businesses.3 min read
2. How to Elect C-Corp Status
3. Why an LLC Might Want Corporation Status
4. State Tax Laws and Corporate Status
C corp election is an IRS classification that is usually chosen by large and medium businesses. A corporation can choose to be either a C corp or an S corp. An LLC has the choice between C-corp, S-corp, and pass-through status.
There are benefits to electing to be taxed as an S corp instead of a C corp. C corporations are subject to double taxation since they pay taxes at a corporate level on all profits and owners must also pay taxes on the profit distributions reported on their personal tax returns.
Businesses, particularly small corporations, may be able to pay less in taxes by calculating the rates for corporate and personal income tax, then figuring out how much should be paid in salaries or kept in the corporation accounts instead of paying all profits as distributions. The corporate tax rates are sometimes lower than personal income tax rates, so this can work in their favor.
C Corp Tax Deductions
Another reason businesses may choose to be taxed as C corporations are the many deductions that are allowed under that structure. For example, C corps can deduct the following:
- Employee benefits such as health and life insurance.
- Education expenses for employees.
- Stock options or profit sharing paid to employees.
- Vehicle expenses.
- Expenses related to moving.
- Retirement plans such as 401(k) and IRA contributions.
Of course, it's always a good idea to consult with a tax expert or attorney when calculating these deductions to make sure they are counted properly.
How to Elect C-Corp Status
When a corporation is formed, it is automatically taxed as a C corp. It may then choose to be taxed as an S corporation instead. If it should later decide to switch back to C-corp status, it must file IRS Form 8832, titled “Entity Classification Election.”
An LLC can also choose to be taxed as a C corporation by filing the same form, 8832. Unanimous agreement by all LLC members is needed, or, alternatively, the consent of an officer or manager of the LLC who has authority over such decisions. Be sure to keep a written document indicating that all members agreed to the change in tax status. The LLC must also provide all names of owners. If it is a single-member LLC, that owner must provide their Social Security Number. If it is a multiple-member LLC, it will need to provide its Employer ID number.
The timing of this filing matters — the LLC cannot be treated as a C corporation any earlier than 75 days before Form 8832 is filed with the IRS. Also, you will need to be absolutely certain this is the right choice, because the LLC cannot change back to a different tax status for five years.
Why an LLC Might Want Corporation Status
An LLC is not recognized as a tax classification by the IRS. Therefore, an LLC must choose to file taxes as a sole proprietorship, partnership, C corporation, or S corporation.
Often S-corp status is more attractive to LLC owners, as it is still considered a pass-through entity. An LLC can only choose S-corp status if it has fewer than 100 shareholders, however. Whether an LLC chooses S-corp or C-corp status, the owners will be protected from personal liabilities and debts from running the business, unlike the owners of sole proprietorships and partnerships.
Whatever tax status a company chooses, it's important to remember that it has no effect on the business's liability protection. The only effect that the tax status has on a business is in the way it is required to pay taxes.
State Tax Laws and Corporate Status
Not all states treat the C-corp or S-corp status in the same way. Most states do accept the federal tax status chosen by a business for state tax purposes. However, some states require S corps to pay income taxes just like a C corporation. This has no effect on how the business is taxed on a federal level. Other states will match the federal tax status without requiring any additional forms to be filed.
States may also have different procedures for changing a company's legal tax status. Before you make the decision, be sure to find out about any special requirements by the state in which your company was formed. You may need to fill out a form for conversion, a certificate of incorporation, and pay additional fees for filing.
If you need help with C-corp election, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.