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Understanding Corporation Taxation

Corporations are established by filing an Article or Certificate of Incorporation with the appropriate State agency. Typically the Articles of Incorporation include:
  1. Name of the corporation
  2. Registered office and agent
  3. Name of Incorporator
  4. Initial Board of Directors
  5. Business Purpose
  6. Par or No-Par Value of Stock
  7. Authorized Shares of Stock
  8. Classes of Shares of Stock

For Tax purposes, corporations may be taxed as a regular "C" corporation, or an "S" corporation. A "C" corporation is a separate taxable entity. "S" corporations are "pass-through" entities where most of the income and expenses "pass-through" to the shareholders for tax purposes.

"C" Corporation

This is a regular business corporation, taxed as a separate business entity at the Federal and State levels. The corporation will file an 1120 U.S. Corporate Business Tax Return, and pay tax on its net income. Net Operating Losses may be carried forward and shareholders do not pay tax on "phantom income." When the corporation distributes dividends to the shareholders, the shareholders are subject to income tax on their individual 1040 U.S. Income Tax Return.On the sale of business assets, the corporation is taxed on its income, and the shareholders are also taxed on the dividends distributed.

"S" Corporation

This is a pass-through type entity. That means most of the income and deductions earned by the corporation is treated as if it were earned by the shareholders.The sale of business assets results in one level of taxation since generally the "S" corporation pays no tax. (There is an exception for "S" corporations that were converted from "C" Corporations.)

Limited Liability Company

Ronald J. Cappuccio, J.D., LL.M.(Tax)
Counsellor at Law
1800 Chapel Avenue West, Suite 128
Cherry Hill, NJ 08002 USA
Phone (856) 665-2121
Fax (856) 665-9005

© Copyright 1996-2009 Ronald J. Cappuccio, J.D., LL.M.(Tax) All Rights Reserved