Corporate Taxation

Generally, an entity becomes a corporation by filing articles of incorporation with the appropriate state agency governing business corporations. However, sometimes a business entity will also be classified as a corporation for tax purposes even if not officially incorporated when it has the following characteristics:

  • An objective to carry on business and divide the gains derived from the business
  • Continuity of life
  • Centralized management
  • Limited liability
  • Free transferability of interest

Corporations are required to file annual income tax returns. The returns are due the 15th day of the third month after the close of the taxable year. Extensions to file are available. The two main types of corporations — the C corporation and the S corporation — differ in the structure and how they are taxed.

C Corporations

A C corporation is so named because it is taxed under subchapter C of the Internal Revenue Code. A C corporation is a separate legal entity that must pay income and other taxes separate from its shareholders. As a result, income is subject to double income taxation. The corporation itself will pay taxes on any gains, and then the stockholders personally pay taxes on any income that is passed on to them by the corporation. The net income of a C corporation is taxed at the corporate level on an annual basis and taxed again at the shareholder level when corporate profits are distributed to shareholders in the form of dividends.

S Corporations

An S corporation is a corporation that qualifies and elects to be taxed under subchapter S of the Internal Revenue Code. Unlike a C corporation, an S corporation is not subject to double taxation. The income of an S corporation is not taxed at the corporate level. Shareholders account for all income, gains and losses on their individual tax returns.

To be classified as an S corporation, all shareholders must elect to have the business taxed under subchapter S. In addition, the corporation must be a small business corporation with fewer than 100 shareholders. The shareholders must all be US citizens and residents, and must be individuals, estates or certain qualifying trusts. An S corporation may not be an ineligible corporation, which is defined to include members of an affiliated group, financial institutions and certain other entities.

An S election for any taxable year must be made on or before the 15th day of the third month of the taxable year or at any time in the preceding taxable year. Thus, an election for calendar year 2009 may be made anytime in 2008 or before March 15, 2009. The election is made by filing a properly completed Form 2553 with the Internal Revenue Service. All persons who are shareholders on the day of the election (and in some cases former shareholders) must consent. Once the election is made, it is effective until revoked or terminated.

A complex set of tax rules also covers corporate reorganizations, distributions, redemptions, dividends, acquisitions and liquidations. Corporations must also consider state and local tax laws when conducting business. In addition, if a corporation has global operations, it must also be cognizant of foreign laws and international tax treaties. An experienced tax attorney can help a corporate taxpayer, as well as its shareholders, navigate this complex area of the law.

Preparing for a Meeting with Your Tax Attorney

To read and print out a copy of the checklist, please follow the link below.

Preparing for a Meeting with your Tax Attorney

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