J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

C Corporations and Their Shareholder-Employees

A C corporation is an entity separate and apart from its owners; it has its own legal existence. Though formed under state law, it need not be formed in the state in which the business operates. Many corporations, for example, are formed in Delaware or Nevada because the laws in these states favor the corporation, as opposed to the investors (shareholders). However, state law for the state in which the business operates may still require the corporation to make some formal notification of doing business in the state. The corporation may also be subject to tax on income generated in that state.

According to IRS data, there are about 2.3 million C corporations, more than 98% of which are small or midsize companies (with assets of $10 million or less).

For federal tax purposes, a C corporation is a separate taxpaying entity. It files its own return (Form 1120, U.S. Corporation Income Tax Return) to report its income or losses. Shareholders do not report their share of the corporation’s income. The tax treatment of C corporations is explained more fully later in this chapter.

Personal Service Corporations

Professionals who incorporate their practices are a special type of C corporation called personal service corporations (PSCs).

Personal service corporation (PSC)

A C corporation that performs personal services in the fields of health, law, accounting, engineering, architecture, actuarial science, performing arts, or consulting and ...