IRS C Corporation: Everything You Need to Know
An IRS C-corporation is the most common business structure in the United States. Starting and maintaining a C-corporation requires extensive paperwork and compliance with the operating agreement. 3 min read
2. Disadvantages of a C-Corporation
3. C-Corporations and State Laws
An IRS C-corporation is the most common business structure in the United States. Starting and maintaining a C-corporation requires extensive paperwork and compliance with the operating agreement. Publicly traded companies and business with over 100 shareholders are almost always C-corporations.
The Benefits of a C-Corporation
- An IRS C-corporation can sell stock to draw wealthy investors, giving the company an almost unlimited potential for growth. If the long-term goals for the business include going public, drawing equity investors, or pulling in venture capitalists, then you probably have or will someday become a C-corporation. Smaller businesses often start out with another business structure and grow into a C-corporation.
- According to Cliff Ennico, who is an attorney, nationally syndicated small-business columnist, and author of a book called the "Small Business Survival Guide" (Adams Media 2005), a C-corporation doesn't have to be large. In fact, it may consist of just one person, as long as that person is not a minor. Sometimes this is set up to protect the owners' personal assets from seizure to satisfy business liabilities. This is perfectly legal, as long as the owners act in accordance with the operating agreement.
- C-corporations can offer multiple classes of stock with no restrictions on who can own those shares. This gives the owners great flexibility as the company grows if they want to sell the business later.
- The shareholders, officers, directors, and employees of a C-corporation enjoy limited liability for the actions of the C-corporation.
- A C-corporation continues to exist, even if the people involved change.
- Other businesses tend to see a C-corporation as more stable and credible than other types of companies.
- There is no limit on the number of shareholders a C-corporation can have. Once the company reaches $10 million in assets and 500 shareholders, it must register with the Securities and Exchange Commission (SEC), as required by the Securities Exchange Act of 1934.
- A C-corporation can take advantage of certain tax privileges, like tax-deductible business expenses and participation in a medical reimbursement plan.
- C-corporations can put away earnings for the future and pay less in taxes on the accumulation than other forms of business.
Disadvantages of a C-Corporation
As Ennico points out, a C-corporation is complicated. Most business owners want to spend time on the mission of the organization, not piles of paperwork. Hiring an accountant is highly recommended. Whether you deal in goods or services, if you decide to operate as a C-corporation, be ready for the time and steps required to improve profits, reduce taxes, and avoid headaches.
- C-corporations are subject to double taxation. Profit is taxed on the corporation and again when it is paid out as dividends to shareholders.
- A C-corporation is an expensive structure to establish. Filing the Articles of Incorporation often requires a large fee, anywhere from $50 to $500. States collect annual fees from C-corporations. While this can be done without an attorney, getting competent legal counsel can save you time and trouble down the road.
- C-corporations are heavily regulated by the government. Tax laws are complex for a C-corporation as well. Multiple forms are required at the federal, state, and local levels, including IRS Form 1120, W2s, and 1099-DIV documents.
- When a C-corporation loses money, the shareholders can't take it off their taxes like they can with an S-corporation.
- C-corporations must hold formal shareholder meetings annually and keep detailed records of those meetings.
- The tax return for a C-corporation is due on March 15 of each year, a month earlier than individual returns.
C-Corporations and State Laws
C-corporations operate according to state law, and the rules vary from state to state. You want to establish the corporation where your operation is based, even if another state has more favorable business laws. If you are a small company doing business in just one state, you don't have to register and pay taxes in other states.
It's tempting to organize in a state like Delaware or Nevada, known for their business-friendly tax codes. However, if you don't do business in those states, you'll be considered a foreign corporation to the states where you actually do work. You'll have to pay taxes in those states anyway. To do otherwise is to operate illegally, inviting attention from regulators in your home state.
If you need help setting up an IRS C-corporation, you can post your job 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, Menlo Ventures, and Airbnb.