Meaning of C Corporation: Everything You Need to Know
The meaning of "C-corporation" boils down to two things: a C-corporation is a separate legal entity from its shareholders, and its liability is limited to the extent of its business assets.3 min read
The meaning of "C-corporation" boils down to two things: a C-corporation is a separate legal entity from its shareholders, and its liability is limited to the extent of its business assets.
What Is a C-Corporation?
A C-corporation is the default structure of an incorporated business. It's often referred to as a regular corporation. A C-corporation is a distinct legal entity from its owners, also known as "shareholders." Due to its distinct legal identity, a corporation can enter into contracts and initiate legal actions.
If someone sues the corporation, its shareholders are liable only to the extent of their investment. Shareholders cannot be held personally liable for anything related to the business of the corporation.
If a corporation fulfills the specified conditions, it may elect for S-corp status for favorable tax treatment. The term "C-corporation" is used to differentiate the standard corporate structure from other forms of business.
- Sufficient investment for business capital
- Issue of stocks to founding shareholders
- Maintenance of proper records for corporate business (separate from its owners)
Structure of a Corporation
- They are the owners of the company.
- They have a share in the corporation's stock.
- They elect the directors.
- They can amend the corporation's bylaws.
- They are authorized to approve major business decisions, like mergers, amalgamations, and the sale of assets.
- Only shareholders are authorized to dissolve the corporation.
- Directors manage the corporation.
- They are responsible for running the business of the corporation.
- They can issue stock, elect officers, and make major business decisions.
- Every corporation must appoint certain officers, such as a president and secretary.
- These officers run the day-to-day operations of the corporation.
Employees: These are salaried workers of the corporation.
How to Form a C-Corporation
- Search and reserve a business name for your corporation, usually with your Secretary of State.
- Prepare and file the Articles of Incorporation with the Secretary of State.
- Issue stock certificates to founding shareholders.
- Get licenses and certificates applicable to your industry.
- Apply for an Employer Identification Number.
- Apply for state and local ID numbers. In most of the cases, you'll need ID numbers for disability, unemployment, and other payroll taxes.
Financing a Corporation: Equity
- Equity can be in the form of cash, property, or services.
- A corporation issues stocks in return for the equity invested by the owners.
- Usually, each stock represents $1 of equity.
- If you are planning to exchange your property for stock, consider consulting a tax advisor. If your property has appreciated in value, you may be liable to pay taxes on the exchange transaction.
Financing a Corporation: Debt
Debt refers to the money borrowed from banks, shareholders, and creditors. The IRS closely monitors a corporation's debt in order to ensure that it's within appropriate limits and that the corporation pays adequate interest on it.
If the owner of a corporation guarantees a loan in his personal capacity, he becomes personally responsible to pay back the amount so guaranteed.
Unlike in the case of dividends (which are paid on equity), there is no tax on repayment of debts. Instead, the interest paid on debts is allowed as a deduction from the taxable income. That's the reason why many corporations prefer to take debts from their shareholders through the issue of promissory notes.
Note that interest accrued on debts is taxable in the hands of the lender.
Advantages of a C-Corporation: Limited Liability
Most business owners go for incorporation due to the limited liability benefit that the corporate status offers. Small business owners prefer incorporation over expensive liability insurance to safeguard their personal assets.
At most, the shareholders may lose the amount they have invested, but their personal assets remain unaffected by the losses and indebtedness of the corporation.
The principle of limited liability applies to shareholders, employees, officers, and directors of the corporation.
Advantages of a C-Corporation: Raising Capital
- A corporation can easily raise capital through the issue of stock.
- A corporation can issue different classes of stocks. Often, preferred stocks are issued to attract a higher number of investors.
- Raising capital in return for the prospects of dividends helps the corporation avoid high interest rates on loans.
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