How to Follow the Tax Laws for Subchapter C Corporations

Most business owners have heard the terms "S corporation" and "C corporation." What these phrases refer to are corporations taxed under Subchapters S or C of the Internal Revenue Code. Understanding how your corporation is taxed, and why, is all part of making strong business decisions and better leveraging your capital.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Computer with Internet access

Understand the Taxation Categories for Corporations

1. Know that most corporations are accorded C corporation status, which means that they are taxed under Subchapter C of the Internal Revenue Code. This means that the corporation itself will pay taxes, unlike an S corporation, which passes tax liability onto the shareholders and partners.

2. File taxes for your C corporation just as you would as an individual. After business deductions, taxes are paid on the company's profits.

3. Understand that if your company pays taxes and the shareholders have no liability for the corporation, then you very likely have a corporation that is taxed under Subchapter C.

Ensure That You Are in the Correct Tax Category

4. Speak to your accountant or tax attorney. It's possible that your company could be operated more efficiently as an S corporation. Ask about how to engage in income splitting, or posting profits across two or more years to take advantage of the lowest tax rates. You can also ask about other legal strategies.

5. Ask other business owners who run companies of a similar size and structure what strategies work well for them. Ask these individuals for the names of good business attorneys, accountants and other professionals who can help you build your business.

Tips & Warnings

• If you don't know what subchapter you are taxed under, you are very likely using C corporation status. This is by far the most widely used and understood corporate tax structure, as it keeps liability within the company, which is one of the greatest attractions of incorporating.
• Budget several hours to thoroughly research your corporation's tax status. The information can be confusing when you first read it, but understanding it is vital to the success of your business.
• Most C corporations use the 1120 tax form when paying income taxes. You can download this form at the IRS Web site (see Resources, below).
• Understand that taking proper care of your taxes can shield you from future liability, and can help you maintain goodwill, that nebulous concept that includes customer faith and trust.
• Don't try to avoid paying for an accountant or tax attorney. These professionals know how to use all of the most business friendly tools to help their clients succeed.

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