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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:
- Name of
the corporation
- Registered
office and agent
- Name of
Incorporator
- Initial
Board of Directors
- Business
Purpose
- Par or
No-Par Value of Stock
- Authorized
Shares of Stock
- 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.)
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