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C corporation liquidating dividend

To maintain legal status as a corporation, it must keep corporate records and hold an annual meeting of shareholders and directors.

Shareholders who work in the corporation, as is often the case in closely held corporations, are treated as employees of the corporation under tax law — they are not self-employed.

A C corporation, or a partnership where at least 1 partner is a C corporation, must use the accrual method of accounting if its average annual gross receipts exceed $5 million for the 3 tax years preceding the current tax year ).

Although a business can choose a state of incorporation other than where they are doing business, states also have requirements for any foreign corporations, which are corporations doing business within their borders that were incorporated in another state, including filing tax returns, to pay franchise taxes and other corporate taxes.

) However, there may be nontaxable benefits to being a foreign corporation that the business owners would want to take advantage of, such as better protection from liability or not having to disclose the names of corporate shareholders.

Also, this new tax law lowers the tax rate on repatriated funds held overseas by corporations.

Previously, corporations were taxed at the maximum rate of 35% on their worldwide income, including income earned in other countries, but this tax can be deferred on international earnings by keeping the funds overseas, which many corporations have done.

To promote repatriation, a special tax rate will be applied to repatriated funds: 15.5% rate for funds held as cash and 8% for non-cash holdings.

A disadvantage to C corporations is that they do not benefit from the favorable long-term capital gains tax rate.

However, if a business is expecting to incur losses in the beginning, as is often the case, then many businesses choose to start out as an S corporation so that the losses pass-through to the owners, allowing them to deduct losses against other income.

When the corporation becomes profitable, then the business owners can convert it to a C corporation.

If the applicable time period is less than 12 months, then the income is annualized.