C Corporations, the Standard Model for California businesses
A California C corporation is a standard business model for California businesses. Though not a very flexible structure for some businesses, they often will offer the best protection for shareholders. The defined structure of a C corporation may be a necessity for your business, if you are seeking financing for your business, be it through a bank or through venture capital funds.
Shares are issued by a C corporations and each shareholder becomes an owner in the company. There can be multiple classes of shares each with its own restrictions and benefits, and shares can be sold and new shares can be issued, as needed. A corporation must have at least three directors under California law, unless there are less than three shareholders. In that case, the number of directors may be equal to or greater than the number of shareholders. For example, if the corporation has only one shareholder, the number of directors may be one or two. If the corporation has two shareholders, the number of directors may be two (or three, which is the normal minimum).
How and when taxes are paid for C corporations
California C corporations do have some advantages in how and when taxes are paid. They are taxed as separate entities from their owners. Therefore, they do not undergo pass-through taxation. The income of the California C corporation is taxed before being divided amongst shareholders, when the corporation files its own tax return. Hence, most taxes are paid at the corporate level and are not “passed through” to the shareholder level.
However, the income is taxed again when shareholders file individual tax returns after receiving dividends. This is called double taxation, and can be avoided with S – corporations and California LLCs. As these dividends have already been taxed at the corporate level, they usually qualify for a lower rate of 15 percent upon being taxed at the individual level.
Employees and managing shareholder’s salaries can be deducted from a C corporation’s taxable income. The ability to control the distribution of your profits is the primary tax advantage of California C – corporations. Taxation is controlled by keeping money in the corporate bank account until you are ready distribute the funds the shareholders as dividends, thus paying taxes at the most advantageous time.
DiJulio Law Group