Think of industry big-wigs like Walmart, Apple, and Microsoft: big-time businesses with powerful leaders who can bring the company to greatness: those are C-corps. Most businesses, whether they’re C-corps or not, find tax rates as intimidating as kryptonite if they don’t know everything about them. Let’s uncover all those questions on C-corp tax rates so you can fearlessly fly to your C-corp journey.
All About C Corporation Formation
Firstly, a C Corporation— or C-corp for short— is a business entity with multiple shareholders and owners. Each owner has a small piece of interest in the company and is taxed separately from the business itself. There are certain elements of a C-corp that separate it from other business entities like LLCs and S-corps.
In a C-corp, each owner is also called a shareholder and can own as many shares of the company as they want. As opposed to an LLC or S-corp, which might use its founder’s own money or use crowdfunding, a C-corp gets its funding from shareholders buying their shares.
Just like with an LLC and an S-corp, a C-corps’ liability lies within the business, and shields all shareholders from personal liabilities if any legal claims were to arise against the business. If someone were to sue McDonald’s (which they have), none of its shareholders would be held personally liable for those claims.
When to Form a C-corp
If you’re starting your business with ownership in mind, and envision it to embody multiple shareholders— some international, some even a part of other corporations— with either common or preferred stock, then consider starting a C-corp. A common stock gives the stockholders voting rights but doesn’t put them first in line to receive dividends. Preferred stock doesn’t have voting rights, but they’re the first to receive payouts if that company gets liquidated.
Small business owners who are looking to start their business using their own money and skills rarely consider forming a C Corporation, at least at the beginning of their business venture. They’ll probably start with an LLC or an S-corp, since it protects their personal assets but doesn’t require managing the complexities of stock ownership.
UpCounsel suggests that “it’s generally not worth choosing the C-corp structure unless a business has at least six figures’ worth of profits each year. Otherwise, the extra legal fees and paperwork may be problematic.” The Motley Fool outlines times when forming a C-corp makes sense for your business, like if you have foreign connections, want to reinvest profits, want to reap more growth potential, and want to attract many investors.
If you’re just starting your small business, consider looking into an LLC or an S-corp, but if you’ve been working in businesses for a while and know the benefits of a C-corp, they may be well worth it!
Tax Rates for C Corporations
The federal tax rate for C Corporations is a flat 21% on its operational profits. On top of that, it has to pay both state and local taxes, just as any business would, through filing Form 1120.
Something unique about C-corps that LLCs and S-corps can avoid is something called double taxation, where income taxes are paid twice on the same source of income— once by the C-corp, and once by the shareholder.
This is where different filing options come into play— a C-corp can either file as a C-corp when paying their taxes or as an S-corp to avoid that controversial double taxation.
How to File as a C Corporation
Take a look at the following steps that will allow you to seamlessly file as a C Corporation.
Step 1: File your Articles of Organization through your state’s government website like the Department of Revenue or the SBA’s website.
Step 2: Get an Employee Identification Number (EIN) so you can open a business bank account. While some states include this in the Articles of Organization, others allow you to file for it later. Either way, an EIN will allow you to open a business bank account so you can divide your personal income from your business.
Step 3: Open a business bank account so you can separate your personal assets from the business assets.
Step 4: Create an operating agreement to establish laws and bylaws for your shareholders. This will name stakes, set limits, and establish rules for stakes, finances, and distribution.
Step 5: Name a registered agent, board of directors, and issue stock certificates. A registered agent can be yourself, or if you’re establishing your C-corp from another country, will be someone who’s located in the state that you registered. At this time, establish your board of directors through elections by your shareholders who are available for quarterly meetings, and grant stock certificates to all the shareholders as proof of their ownership.
Step 6: Apply for necessary licenses and permits.
The Corporate Alternative Minimum Tax (CAMT)
The U.S. Treasury and the IRS announced a tax imposed through the Inflation Reduction Act to go into effect this year (2023). It states that large corporations that intake over $1 billion a year are to pay a 15% minimum tax on their adjusted financial statements.
C Corporations vs. S Corporation Tax Rates
S Corporations are considered pass-through entities, so they’re only taxed once. There’s no corporate tax, just the taxes that business owner has to report on their personal tax returns.
C Corporations are double taxed, meaning both the corporation and its shareholders have to pay taxes on the same dividends.
C Corporation Tax Deductions and Credits
Corporations have personnel deductions, which include salaries, wages, health care, retirement, training, vacation, disability, and more, and vehicle deductions, like fuel, oil changes, lease payments, and more.
Form and Grow Your C Corp Hassle-Free.
All the laws and regulations for forming and running your C-corp could make your head spin a bit. Leave it to the experts, so you can concentrate on growth. Form your C-corp today with doola!
Do you get a tax credit for starting a business?
There are tax deductions for starting a business, which includes $5,000 of your start-up costs and $5,000 of your organizational costs as business expenses in the first year if your start-up costs are less than $50,000.
How does the federal solar tax credit work for businesses?
The 30% solar tax credit allows you to deduct 30% of the cost of your solar energy system from your business taxes as a dollar-for-dollar credit.
Can not-for-profit businesses claim tax credits?
Nonprofits are eligible for certain tax benefits, like being exempt from paying income and property taxes.
Can you claim credit card interest for business on taxes?
Yes, the credit card interest you pay towards your business can be claimed as a business expense.
Can you claim a tax credit for small business loss?
You can claim business losses as a deduction.