What is a C-Corporation?
C-Corp is a business structure in the United States in which the entity is taxed separately from its owners. A C-Corp has a legal identity separate from its owners and it is subject to separate tax compliances.
Almost all the C-corps are publicly traded companies.
Features of a C-Corporation
- C-Corporation has a separate legal identity- As stated above a C-Corporation have its own identity separate from its owners. It is subject to pay its own taxes, file tax returns, pay own debts and discharge obligations on its own
- Limited liability for the owners- Having a separate legal status from its owners, C-Corporation provide limited liability protection to its owners, personal assets of an owner is protected and cannot be held liable to discharge liabilities of a C-Corp
- Perpetual existence- Continuity of a C-Corp is not affected by change in its membership. Shareholders may leave or die, but a C-Corp continues to exist
- Separation between ownership and management- A C-Corp has a proper structure of operation, its shareholders are the owners who by holding meetings appoints responsible team of professionals to run their day to day affairs called the managers of the business
- No restriction on who can hold shares- IRS imposes no restriction on the type of individual or entity who can hold shares in a C-Corp
- Readily transferable shares- Shares of a corporation are easily transferable through sale of stock
- Well established legal status- It has its own identity in the eyes of law separate from its owners
- A good public image- A C-Corp is more trusted by investors as it abides by many corporate formalities and legal compliances
Disadvantages of a C-Corp
Complexity- A C-corp has complex operations, more formal formalities, and statutory compliances. Mandatory shareholder and director meetings are held. C-Corp need to maintain books and records.
Double taxation- A C-corp is a separate tax paying entity. It pays tax on its corporate income after offsetting expenses, deductions and credits from the income. Then a C-corp pays after tax income is distributed to shareholders. Shareholders pay personal income tax on dividends earned. This is mentioned as a Double taxation.
Tax filing for a C-Corp
C-Corp needs to file Form-1120 C: U.S. Corporate Tax Return.
A C-Corp is also subject to employment taxes like Social Security taxes, Medicare taxes, Income tax withholding (Form 941) and Federal Unemployment tax (Form 940)
Social security tax
It is a tax levied on both the employers and employees to fund the Social Security program.
This tax is mandated by the Federal Insurance Contributions Act (FICA).
This tax is collected by a C-Corp in the form of payroll tax.
Social security tax rate is 12.4%, which is equally divided between employer (6.2%) and employee (6.2%).
Medicare tax
Medicare tax is also known as “hospital insurance tax” is a part of federal employment tax. It is withheld from the employee’s salary. It is collected to fund the Medicare Insurance Program.
This tax is mandated by the Federal Insurance Contributions Act (FICA).
Medicare tax funds the hospital, nursing home and medical expenses for elderly and disabled individuals.
Medicare tax rate is 2.9% which is equally charged from employer (1.45%) and employee (1.45%).
Federal Unemployment tax
Federal Unemployment Tax Act (FUTA) is a tax act that established payroll tax to fund unemployment benefits. This tax is applicable on the wage base, the wage base rate varies from state to state. Prevailing tax rate is 6%.
Due date of Tax filing forms
Due date of filing Form 1120-C is 15th day of the fourth month following the end of financial year of a business. So, the due date is 15th April if calendar year is the fiscal year for an entity.
Penalties for Non-filing
Failure to file Form 1120 results in a penalty of 5% of the unpaid taxes for each month or part thereof till the default continues, up to maximum penalty of 25%.
Extension for Tax filing
An extension in Form 7004 can be filed by a C-Corp to opt for automatic extension of 6 months to file Form 1120-C.
Tax Rate for a C-Corp
Federal Corporate Taxes applicable to C-Corp is at a flat rate of 21%. State taxes may apply on C-Corp depending upon the State of its incorporation or operations.
Franchise Tax
Franchise tax is a State-tax which an entity pays to Franchise Tax Board to operate its business in a state. Franchise tax rates applicable to a C-Corp varies from state to state.
There are some US states which have no State Income tax applicable – Wyoming, Texas, South Dakota, Florida, Alaska etc.