One of the most important questions founders face is how to structure their businesses. Different business structures come with different implications for taxes, liability, regulatory requirements, and more.
We recently published a guide to LLC taxes, but many business owners are also interested in incorporating as a C-Corp. In this article, we’ll explain how the C-Corp structure works and how it will affect your tax burden as an international founder.
Each business structure comes with its own pros and cons, so we can’t tell you whether a C-Corp makes sense for your company. LLCs offer liability protection, tax advantages, and a simple structure. About three-quarters of all businesses incorporated in Delaware are LLCs.
LLCs are pass-through entities, which means that income from LLCs is taxed as the personal income of the members of that LLC. As we’ll see later, C-Corps pay corporate taxes on their profits. Of course, employees and officers are still required to pay personal income taxes on their salary or wages.
On the other hand, C-Corps come with their own advantages. While LLC ownership is distributed among the members, C-Corps can sell stock to investors. This makes them a popular option for startups that are looking for funding. Check out our LLC vs. C-Corp explainer to learn more about the key differences between these two common structures.
C-Corps are responsible for corporate tax on top of other taxes such as payroll and franchise taxes. The current federal corporate tax rate is 21%, so you will need to pay that percentage on all profits. That 21% is in addition to any corporate taxes in the state or states where you operate.
It’s important to remember that corporate taxes only apply to profits, not all income. For example, let’s say you generate $100,000 in revenue one year but spend the same amount on business expenses. In that case, you won’t owe any corporate taxes at either the state or federal level.
21% might sound like a lot, but the reality is that new businesses usually have little to no taxable profits. You can deduct all expenses including salaries and wages from your companies profits, and corporate taxes are only applied to what’s left over. In most cases, you won’t have to worry about steep corporate taxes until the later stages of growth.
Each state has its own corporate tax laws, and some states don’t charge any corporate taxes at all. Furthermore, some states have flat corporate taxes for all businesses, while others charge higher rates for companies with higher profits.
You can incorporate in any US state, but Delaware is the most common place for C-Corp formation. There are two key advantages that motivate small business founders to choose Delaware over other states.
First, there is no state income tax for foreign-owned C-Corps incorporated in Delaware. Avoiding state income taxes could significantly reduce your overall tax burden, especially as your company becomes more profitable.
Second, investors prefer to work with Delaware-based corporations. Delaware offers the nation’s most streamlined business courts and a predictable regulatory environment. Learn more about why most startups incorporate in Delaware.
C-Corp taxes apply to profits at the entity level, so it doesn’t matter whether you live in the United States or somewhere else. However, nonresidents who own 25% or more of a C-Corp need to file Form 5472 on top of the usual reporting requirements.
This doesn’t come with any additional tax payments, but it’s still critical to file your 5472 on time. You could face a steep penalty of $25,000 if you miss the filing deadline. Form 5472 is due on April 15th each year.
C-Corps are often the perfect business structure for founders that are looking for outside investments. With the ability to issue shares to an unlimited number of shareholders, a C-Corp is the perfect vehicle to secure funding for your business.
At the same time, it’s crucial to understand the tax obligations that come with incorporating your company as a C-Corp. Click here to start the incorporation process or take our LLC vs. C-Corp quiz.
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