Updated July 13, 2023
What is C Corporation?
The term “C Corporation” refers to a business structure where the shareholders, owners, and business entities are treated as independent legal entities. It is the most common type of business structure in the US because it offers unlimited growth potential through the sale of equity shares, and there is no limit to the number of shareholders.
In a C corporation, the profit taxation takes place at both corporate and personal levels resulting in double taxation.
Key Takeaways
Some of the key takeaways of the article are:
- In a C Corporation, the personal assets and income of the owners or shareholders are legally separated from that of the business entity.
- Given the liability protection of the owners and investors, the loss due to business failure is limited to the amount they invest in.
- The profits are taxed at the corporate level, and then the dividends are taxed at the individual level. Hence, taxes are paid at corporate and personal levels resulting in double taxation.
- It can issue different classes of stocks, attracting diverse groups of investors.
How Does C Corporation Work?
In a C corporation, corporate tax is levied on the earnings before it is distributed among the shareholders in the form of dividends. After that, the shareholders are taxed personally for the dividends they receive. This is how unfavorable double taxation happens in C corporations. However, it allows shareholders to reinvest profits in the business at a lower corporate tax rate.
Every year the C corporations are obligated to hold at least one meeting for the shareholders and directors. The minutes of these meetings must be maintained to exhibit transparency in business operations. Further, the company bylaws of the business must be held on the premises of the primary business location. Finally, these entities must file annual reports, financial statements, and financial disclosure reports.
How to Form a C Corporation?
An individual needs to follow the following steps to form a C Corporation:
- Choose and reserve a legal name as per state regulation.
- Second, draft the Articles of Incorporation and register them with the Secretary of State.
- Third, infuse an adequate amount of capital into the business.
- Issue stock certificates to the initial stockholders.
- Apply for licenses and other necessary certifications to start the business operation.
- Generate the Employer Identification Number (EIN) by filing the SS-4 form or applying online at the Internal Revenue Service (IRS) website.
- Apply for any other ID needed to cater to the jurisdictional requirements of different states.
Differences Between an S Corporation, C Corporation, and Limited Liability Company
Some of the differences between an S Corporation, C Corporation, and Limited Liability Company are as follows:
|
Differences |
S Corporation | C Corporation |
Limited Liability Company |
| Ownership Status | The owners of the business are known as shareholders | The owners of the company are known as shareholders | The owners of the company are known as members |
| Taxation | It enjoys the benefits of pass-through taxation, where profits are not taxed at the corporate level. Instead, the profits are recorded on the owner’s or shareholder’s tax file. | Since the business entity and the owners are considered separate entities, both are taxable. Hence, they need to pay taxes at corporate and personal levels (double taxation). | It enjoys the benefits of pass-through taxation as the profits are not taxed at the business entity level but only on the personal tax file of the members. |
| Corporate Ownership | There is a restriction on the number of shareholders, which can’t be more than 100. | There is no restriction on the ownership. But on the other hand, the minimum requirement is two or more shareholders. | There is no limit to the maximum or the minimum number of members. |
| Existence | It is a going concern that continues till perpetuity. Therefore, it is not impacted by the death or ceasing of any shareholders. | It is provided perpetual corporate existence. It is a going concern that is not impacted by the death or ceasing of any shareholders. | It has a limited life. It ceases to exist upon the death or bankruptcy of its members. |
Advantages of C Corporation
Some of the significant advantages of C Corporation are as follows:
- First, the owners, shareholders, or directors enjoy liability protection.
- It is a going concern and has perpetual existence irrespective of any change in the ownership or death of any shareholders.
- It offers enhanced credibility that commands respect among the suppliers and lenders.
- It doesn’t have any limit on the number of shareholders.
- The ability to sell stocks to raise funds offers unlimited growth potential.
- It can issue a variety of classes of stocks catering to different types of shareholders. Hence, it can attract other investors, such as standard or preferred stockholders.
- Foreign investors can also buy ownership in a C Corporation.
Disadvantages of C Corporation
Some of the significant disadvantages of C Corporation are as follows:
- First, it faces the problem of double taxation as the profits are first taxed at the corporate level, and then the dividends paid to the shareholders are taxed at a personal level.
- It is an expensive business structure to start as it involves payment of massive fees for filing Articles of Incorporation plus the costs to the state where it intends to operate.
- It is guided by strict rules and regulations, such as complex tax filing rules. Given its liability protection against debts, lawsuits, and other financial obligations, it comes under the compact scanner of government oversight.
Conclusion
So, it can be seen that a C Corporation is comparable to an S Corporation and a Limited Liability Company, among other business structures. The most striking advantage of a C Corporation is its liability protection, which separates a company’s assets from its owners. On the other hand, the major drawbacks of this business structure are double taxation and strict regulatory requirements.
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