C Corporation: Everything You Need to Know
C corporation, or “c corp” as designated by the IRS, offers the unlimited, for-profit growth potential through the issuance and sale of shares8 min read
What is C Corporation?
C corporation, or “c corp” as designated by the Internal Revenue Services, offers the unlimited, for-profit growth potential through the issuance and sale of shares. It is the most common type of corporation organized by companies in the United States. Preferred shareholders and common shareholders are investors in a corporation with apportioned rights to earnings distribution, and some influence on board decision. Public disclosure of share performance in an annual report is mandatory for C corporations under federal law. The legal structure to a business, C corporation status limits owner financial and tort liabilities for losses that may result in the case of a default, negligence lawsuit, or regulatory fine.
An alternative to small business registration of S corporations which allow for “pass through” of earnings to owners, who are in turned subject to individual taxation by the IRS, C corporations report all business earnings by the company without intermediary of such a mechanism. “Limited liability companies” LLC, differ from C corporations as well; providing the legal protections of corporations, but serving as “pass through” instruments like S corporations or sole proprietorships.
An independent legal entity, separate from the members and shareholders, the corporation is remains separate in from the individuals who own, control and manage an entity. IRS Code Sections C and S determine type of taxable entity. Corporate tax returns require Form 1120. Businesses listed under C corporation, face the possibility of double taxation where dividend income is distributed to owners, also considered personal income. Tax on capital gains is a serious consideration when incorporating a business.
Advantages of a C Corporation
There are many benefits of filing C corporation status with state and federal governments. Once approved, a C corporation must file a federal tax return for at least 5 years. C corporations remain official businesses in perpetuity, unless otherwise transferred, under U.S. law. The C corporation carries a lower risk of audit by the IRS, and can deduct the cost of benefit an expense. Lenders and suppliers also prefer working with businesses classified as C corporations, as unlimited growth potential and no shareholders limit, means that liquidity is more likely to be present at any given time. A corporation can also sell volume shares to investors, raising more capital for capacity building projects.
Following the guidelines to the Securities Exchange Act of 1934, when a business reaches $10 million in assets and 500 shareholders, the Security and Exchange Commission requires registration of a company as a stock ticker. C corporations have a responsibility to stakeholders, and especially officers and shareholders, and cannot combine company finance with personal debt obligations of any individual associated with the business. C corporations continues to exist even after the original owners are no longer present. The owners and shareholders of a C corporation automatically have limited liability in relation to business debts and litigation.
Disadvantages of a C Corporation
Taxation is the main drawback of C corporation status. Revenue is taxed twice; both at the company level and shareholder earnings. Filing Articles of Incorporation can also be costly. A C corporation is more expensive to start, and fees are generally a requirement of states in which they operate.
Regulations and formalities associated with C corporation status create the conditions for reporting. Compliance with government oversight and standards generally requires additional time and resources than are demanded of other entities. Tax rules are also more complex, and legal costs to protect a company against losses is common. Distinct from S corporation “s corp” entities, shareholders are unable to deduct expenses and losses on their individual income tax returns.
C Corporation vs. S Corporation
Entity size is the main distinguishing factor in separation of S corporation from C corporation businesses. Both may be comprised of officers, directors, and shareholders, yet there are limits strictly imposed on S corporations not part of the complex realm of C corporation ownership and taxation. SEC restriction of S corporations to 100 shareholders versus the unlimited share distribution guidelines for C corporations illustrates the structural limits of small businesses, and those set up for high profitability.
How to Form a C Corporation
Legal name selection of a “doing business as” DBA fictitious name should be researched to protect the competitive trade and liability of a company’s legal identity. Reservation of a DBA with the Secretary of State in the state where a corporation will be maintained, is the first step to setting up a C corporation, followed by filing of Articles of Incorporation. Issuance stock certificates with initial shareholders does not require SEC registration until a company lists a ticker on the stock market.
Business license registration and other certification such as permits to meet industry specific rules to operation, can be obtained from the state, county, or municipal government in the jurisdiction where the business will be operating. Obtain an Employer Identification Number (EIN) by filing an IRS Form SS-14. C corporations must also apply franchise tax ID numbers in a state where franchise tax payment by corporations is mandatory. Contact the state tax commission or franchise tax board in the state of business registration to find out about the specificities of state tax reporting by a corporation.
Understanding C Corporations Better
Reinvestment at a low tax rate is a major advantage to C corporation status. In sum, a corporation is not only set up to generate business revenues, but serve as leverage for capacity building of a far greater scale over time, than individual investors might have accrued by way of a sole proprietorship, partnership, or S corporation.
Maintenance of C Corporation
The C corporation must maintain the governing bylaws on the premises of the primary business location. Filing of annual reports, financial disclosure reports and financial statements is mandatory under law. One of the requirements of C corporation status, is to hold at least one shareholders and directors meeting, annually. Minutes must be recorded to exhibit transparency in business operations. A C corporation must maintain the voting records of the company's common shareholders and directors, as well as a list of owner's names and apportionment. Preferred shareholders are not voting members, yet have the advantage of guaranteed earnings distribution, regardless of the annual performance of a business.
Double Taxation in C Corporation
The major downside of owning shares in a C corporation for officers, is that taxation of those business earnings is double. The IRS requires C corporations to file business income tax reporting, including record of apportionment. Income after business expense and salary deductions is subject to tax. The net income distributed to shareholders in the form of dividends is again taxed at the individual level. When profits are left over at the end of the year, dividend distribution to shareholders are income, and individual income, and those earnings must be taxed.
Similarities With S Corporation and C corporation
The similarities between C corporations and S corporations is quite a few. Formation of both corporations is done by filing with the Secretary of State of the jurisdiction where the business will be maintained. S corporations elect special tax status by filing an IRS Form 2553, under Subchapter S of the Internal Revenue Code. C corporations and S corporations both offer owners and shareholders limited liability protection; separating businesses negligence from personal responsibility.
Both types of corporations have shareholders, directors and officers. Shareholders are 100 or less for a S corporation, so growth potential is restricted to a set number of investors, whereas the C corporate has a potentially infinite pool of investing shareholders to draw from. Election of board of directors is required, regardless of corporate structure adopted. The board oversees and authorizes corporation affairs, and are not responsible for the day-to-day operations of the organization. Formalities are similar, such as adoption of bylaws, share issuance, annual director and shareholder meetings, annual report filings, and payment of annual state fees.
Differences With S Corporation and C Corporation
Despite similarities, C corporation and S corporation are distinct in many respects. Tax structure is the most significant difference between S corps and C corps. Small business owners generally file individual tax returns on business income legally subject to “pass through” by an S corporation. The trickle down of revenue and losses recorded by an S corporation is filed in IRS Form 1120S an informational federal return, and no income tax is paid by the corporation itself. In both cases, personal income tax is drawn on end of the year stock dividends.
The are no restrictions to C corporation ownership. S corporation rules restrict shareholder status to US citizens/residents. S corporations may not be owned by LLCs, C corporations, partnerships, other S corporations or some trusts. S corporations only distribute preferred shares without voting rights, while C corporations typically have multiple classes, including common share distribution with voting rights. The C corporation structure offers more flexibility overall.
S Corporation (S Corp) Election
Filing IRS Form 2553 is election of S corporation tax reporting status. The election is effective the current tax year the Form 2553 filing takes place. Filing of Form 2553 election of S corporation status can be done before the 16th day of the third month, or March 15th of the tax years. Some states also require a company file S corporation election after approval of incorporation status is authorized.
C Corporation Requirements
C corporation filings must document adequate investment capitalization to be approved. C corporations must also issue stocks to initial shareholders to meet eligibility requirements. Maintenance of a C corporation organization must be evidenced in administration and record of regular director and shareholder meetings. Business transactions must be kept separate from owner expenses for purposes of Corporation tax reporting.
Advantages & Disadvantages of C Corporations
Weighing the advantages and disadvantages of C corporation status is a serious undertaking for an investor decision about registering a business. C corporation status offers unlimited share issuance, and shareholder investment from anywhere in the world. popular business structure the top election by owners. Share diversification, reinvestment potential, and the widest range of deductions and expenses allowed by the IRS make the C corporation the most complex, and most leveraged for-profit option.
Tax Advantage: Wide Range of Deductions & Expenses
With the widest array of expense deductions entitled by the IRS, the C corporation allows for reimbursement for employee fringe benefits. Cost deductions for medical and other employee benefit program assets, including all health insurance premiums paid by the corporation, are a tax advantages. Organizations not filed as C corporations have far fewer expense deductions related to the cost of benefits. Employee/shareholder who owns more than 2 percent of a corporation, however, must pay taxes on the full value of benefits received from the company.
Who C Corps Benefit and Who Shouldn’t Use Them
C Corporations are exceptionally beneficial for companies dedicated to the sale of goods. For example, when a C corporation demands cash flow, inventory and other business assets such as accounts receivable can be exchanged for factored business loans based on in-house collateral.
How to Avoid the Double-Taxation Scenario
To avoid the biggest glitch associated with C corp duty, structure the C-Corp for zero inventory and zero profit, to take maximum number of deductions allowed by the IRS, thus reducing net income.
If you need help with your C Corporation, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.