Filing Federal Taxes as a Corporation
Federal taxes for corporations differ, depending on whether you have an S corporation or a C corporation; each has unique federal tax requirements and practices. In fact, not even all corporations file tax returns. Some smaller corporations are designated as an S corporation and pass their earnings on to their stockholders.
Check with your accountant to determine whether incorporating your business makes sense for you. Tax savings isn’t the only issue you have to think about; operating a corporation also increases administrative, legal, and accounting costs.
Here’s how each kind of corporation files taxes:
S corporation: An S corporation must have fewer than 75 stockholders. It functions like a partnership but gives owners more legal protection from lawsuits than traditional partnerships do. Essentially, an S corporation is treated as a partnership for tax purposes, but its tax forms are a bit more complicated than a partnership’s: All income and losses are passed on to the owners of the S corporation and reported on each owner’s tax return, and owners also report their income and expenses on Schedule E (see these figures).
See the IRS Web site for complete forms.
C corporation: The type of corporation that’s considered a separate legal entity for tax purposes is the C corporation. A C corporation is a legal entity that has been formed specifically for the purpose of running a business.
The biggest disadvantage of structuring your company as a C corporation is that your profits are taxed twice — as a corporate entity and based on dividends paid to stockholders. Corporate taxation is very complicated, with a lot of forms to be filled out, so get yourself a good accountant.