C corporations, which are the traditional corporations that people think of when you say the word “corporation,” have fallen significantly out of favor over the course of the last several decades with small businesses. The reason is probably pretty simple – C corporations are taxed at the entity level. In other words, unlike limited liability companies and S corporations, C corporations have to pay taxes and then the shareholders that receive the profits from the C corporations have to pay taxes on the money that was just taxed at the corporate level. So, it’s double taxation, and as a result, it makes sense why people shy away from forming C corporations.
However, there are some reasons to still form a C corporation. One of them is the ability to withhold income at the corporate level, therefore deciding not to distribute all the corporation’s profits to shareholders. This is not an option in either LLCs or S corporations. With those aforesaid entities, all profits flow through those business structures and have to be distributed to the members/shareholders. Therefore, profits, if any, are always taxed at the individual owner level. This does not have to be the case for C corporations, which can choose to solely be taxed and keep profits within the corporation for use by the company. This is a slight oversimplification, but it’s basically true.
Another reason to form a C corporation has to do with ownership privileges, maximum number of shareholders allowed, and scalability. With limited liability companies, membership interests are not as transferable and generally come with managerial ability tied in. So LLCs are better suited to closer management by owners, through a limited number of members. Furthermore, with S corporations, the number of shareholders is limited to 100. So, while 100 is quite a few shareholders, there will never be the ability to scale an S corporation to include even thousands of shareholders, which matters if you want to more openly trade the shares someday.
As pertains to the preparation of the return, the main form in a C corporation’s return is the 1120. To repeat my oft used sentiment, this is the form from which all other forms’ numbers flow into. It’s the hub of the wheel, so to speak.
In the first section of Form 1120, you’ll notice fundamental information about the corporation is requested, such as the C corporation’s name, address, incorporation date, employer identification number, and total assets. Next, the first accounting section of the return is the income section where different types of income are totaled, and cost of goods sold are deducted. Use Form 1125-A to calculate cost of goods sold, which relates to a company with fluctuating inventories. Next, the deductions section encompasses an articulation of all the business deductions that the C corporation may take, including line 26, other deductions, for all deductions not articulated specifically on lines 13 through 24. At the bottom of the deductions section, you compute taxable income, in the absence of a net operating loss or special deductions, by subtracting line 27, total deductions, from line 11, total income.
As was stated previously, the main way that an LLC or S corporation differs from a C corporation is that a C corporation is taxed at the company or entity level and the other two are not. Schedule J, Tax Computation and Payment, allows for the figuring of the total tax amount due by calculating the different types of taxes that C corporations are liable to pay and then subtracting credits and prior payments. This calculation is similar to lines 12a through 23 on Form 1040, just more complex due to the underlying corporate context.
Additionally, page 2 contains Schedule C, Dividends, Inclusions, and Special Deductions, which tallies certain types of dividend income your C corporation has received, along with also summing certain types of special deductions. These total dividends and inclusions are then inserted on line 4 of the income section on page one, and the special deductions are included on line 29b in the deductions section, also on page one.
Next, on pages four and five of 1120, Schedule K, Other Information, there are a series of mostly yes or no questions that pertain to the ownership, structure, and finances of a C corporation. The details of this are outside the purview of this article, but worth looking into on your own if you are curious.
Finally, Schedule L, on page 6, represents the balance sheet. Suffice it to say that the balance sheet should balance, meaning assets should equal liabilities. So, for example, if there are $270,000 in assets, there should $270,000 in liabilities. Balance sheets are complex, and probably should really only be broached by a professional. But they are worth mentioning to edify your understanding of the main components of a C corporation return.
If you are having problems with your C corporation return, or any tax problems, for that matter, call Dino Tax Co today at (713) 397-4678 or email email@example.com. The first consultation is free and we let you ask any questions you may have. Also, consider liking us on Facebook: www.facebook.com/dinotaxco.