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 taxation of the profit takes place at both corporate and personal levels resulting in double taxation.
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 at a personal level for the dividends that they received. This is how the unfavorable double taxation happens in C corporations. However, it allows the shareholders to reinvest the profit back into 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 maintained on the premises of the primary business location. Finally, these entities need to file annual reports, financial statements, and financial disclosure reports.
How to form a C Corporation?
An individual needs to follow the following steps in order to form a C Corporation:
- Chose and reserve a legal name as per state regulation.
- Second, draft the Articles of Incorporation and register it 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 certificates that are needed 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 business are known as shareholders | The owners of the business are known as members |
| Taxation | It enjoys the benefits of pass-through taxation, wherein the profits are not taxed at the corporate level. Instead, the profits are recorded on the owner’s or shareholder’s personal tax file. | Since the business entity and the owners are considered to be separate entities, both are taxable. Hence, they need to pay taxes both at corporate as well as 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 major 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 the sale of stocks for raising funds offers unlimited growth potential.
- It can issue a variety of classes of stocks catering to different types of shareholders. Hence, it can attract different groups of investors, such as common stockholders or preferred stockholders.
- Foreign investors can also buy ownership in a C Corporation.
Disadvantages of C Corporation
Some of the major 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 huge amounts of fees for filing of Articles of Incorporation plus the fees to the state in which 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 close scanner of government oversight.
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, they lose due to business failure is limited to the amount they invest in it.
- The profits are taxed at the corporate level, and then the dividends are taxed at the individual level. Hence, taxes are paid both at corporate and personal levels resulting in double taxation.
- It can issue different classes of stocks, attracting different groups of investors.
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 the liability protection that it offers, wherein it separates the assets of a company from that of its owners. On the other hand, the major drawbacks of this business structure are double taxation and strict regulatory requirements.
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