C-corporation

What is a C-Corporation?

A C corporation (or C-corp), under United States federal income tax law, is any corporation that is taxed separately from its owners. A C corporation is distinguished from an S corporation, which generally is not taxed separately. Many companies, including most major corporations, are treated as C corporations for U.S. federal income tax purposes. C corporations and S corporations both enjoy limited liability, but only C corporations are subject to corporate income taxation.

A C corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.

C-corps can be compared with S corporations and limited liability companies (LLCs), among others, which also separate a company’s assets from its owners, but with different legal structures and tax treatment. A newer type of organization is the B-corporation (or benefit corporation), which is a for-profit firm but different from C-corps in purpose, accountability, and transparency, but aren’t different in how they’re taxed.

C corporation vs. S corporation

Generally, all for-profit corporations are automatically classified as a C corporation unless the corporation elects the option to treat the corporation as a flow-through entity known as an S corporation. An S corporation is not itself subject to income tax; rather, shareholders of the S corporation are subject to tax on their pro rata shares of income based on their shareholdings. To qualify to make the S corporation election, the corporation’s shares must be held by resident or citizen individuals or certain qualifying trusts. A corporation may qualify as a C corporation without regard to any limit on the number of shareholders, foreign or domestic.

Benefits of a C Corporation

C corporations limit the personal liability of the directors, shareholders, employees, and officers. In this way, the legal obligations of the business cannot become a personal debt obligation of any individual associated with the company. The C corporation continues to exist as owners change and members of management are replaced.

A C corporation may have many owners and shareholders. However, it is required to register with the Securities and Exchange Commission (SEC) upon reaching specific thresholds. The ability to offer shares of stock allows the corporation to obtain large amounts of capital which may fund new projects and future expansions.

Benefits of Forming a C Corporation

Forming a C corporation offers multiple benefits, including:

  • Limited Liability Protection. C corporations protect owners, shareholders, officers, directors, and employees from personal liability.

  • Independence From Owners. Because a C corporation’s management remains separate from its owners, the business can continue to operate regardless of any ownership or management changes.
  • Unlimited Shareholders. C corporations can have an unlimited number of shareholders from anywhere in the world. They also can issue several classes of shares.
  • Increased Credibility. Incorporating your company gives it credibility when you conduct business with others or try to obtain financing.
  • Wide Range of Expenses and Tax Deductions. C corporations have the widest range of business expenses and tax deductions recognized by the Internal Revenue Service (IRS).
  • Investor-Friendly Taxation. Unlike other business structures, C corporation shareholders only have to pay taxes when they receive dividends from the company. This is a major reason investors prefer C corps: they only need to worry about paying tax for the money they actually received.

Disadvantages of Forming a C Corporation

This business structure also poses a few key challenges:

  • Required Structure and Increased Regulations. C corporations must follow a strict operational structure while ensuring compliance with numerous regulations at the federal, state, and local levels.

  • Increased Fees and Paperwork. Due to the strict structure and regulations imposed on C corporations, they also face more fees and paperwork. Depending on a C corporation’s specific setup, its formation can cost thousands of dollars in addition to ongoing fees for maintaining the corporation. C corporations also tend to spend more money keeping track of taxes as well as business and financial records in order to ensure regulatory compliance.
  • Double Taxation. Often the most-cited disadvantage of forming a C corporation, double taxation occurs when a company has a profit left at the end of a year and distributes it as dividends to its shareholders. While the C corporation already paid taxes on the profits, shareholders must now declare the dividends as income on their personal taxes and pay tax at their own personal rate.

How to Form Your C Corporation

Several steps are required to successfully form a C corporation. First and foremost, you need to choose a name for your corporation. The name of your C corporation should be both legal and distinct. Once you have found a suitable name, you should reserve it with your Secretary of State if name reservation is available for C corporations in your state.

Drafting your Articles of Incorporation is the second step in forming your C corporation. This document will need to include a variety of information, such as the name of your corporation and its physical address. Once you have completed your Articles of Incorporation, this document needs to be filed with your Secretary of State. A filing fee will more than likely be required.

Issuing company stock is step three of C Corp formation. When shareholders purchase your stock they become owners of the company. This is one of the most important steps required for forming your C corporation. Next, you will need to obtain an Employer Identification Number (EIN) for your business. You can apply for your EIN online with the IRS. Without this number, you will not be able to report or pay your corporation’s taxes.

Finally, you need to apply for any other required licenses, permits, or identification numbers. There may be numerous state and local regulations that apply to your C corporation. With this in mind, you will need to comply with all of these rules if you want your company to remain in good standing. For example, you will likely be required to pay disability, payroll, and unemployment taxes, which requires a separate tax identification number from your EIN.

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