How Corporations are Taxed

Most businesses will need to register with the IRS and state and local revenue agencies, and receive a tax ID number or permit.

Corporations are required to pay federal, state, and in some cases, local taxes. Most businesses must register with the IRS and state and local revenue agencies, and receive a tax ID number or permit.

When you form a corporation, you create a separate tax-paying entity. Regular corporations are called “C corporations” because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.

Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice – first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.

Shareholders who are also employees pay income tax on their wages. The corporation and the employee each pay one half of the Social Security and Medicare taxes, but this is usually a deductible business expense.

•Limited      Liability. When it comes to taking responsibility for business debts and      actions of a corporation, shareholders’ personal assets are protected.      Shareholders can generally only be held accountable for their investment      in stock of the company.

•Ability      to Generate Capital. Corporations have an advantage when it comes to      raising capital for their business – the ability to raise funds through      the sale of stock.

•Corporate      Tax Treatment. Corporations file taxes separately from their owners.      Owners of a corporation only pay taxes on corporate profits paid to them      in the form of salaries, bonuses, and dividends, while any additional      profits are awarded a corporate tax rate, which is usually lower than a      personal income tax rate.

•Attractive      to Potential Employees. Corporations are generally able to attract and      hire high quality and motivated employees because they offer competitive      benefits and the potential for partial ownership through stock options.