Key Takeaways

  • A C corporation is a legal entity separate from its owners, taxed under Subchapter C of the IRS Code, with profits taxed at both corporate and shareholder levels.
  • C corporations offer limited liability protection, perpetual existence, and the ability to issue multiple classes of stock.
  • They can have unlimited shareholders, including foreign owners, and can more easily attract investors through stock offerings.
  • Disadvantages include double taxation, higher administrative costs, and stricter record-keeping requirements.
  • They are often preferred by businesses seeking venture capital or planning to go public due to flexible ownership and strong legal protections.

Regular C corporation is the default tax status of a business unless it applies for an S corporation status. C corporations file taxes on corporate and personal levels, making them prone to double taxation. Despite this, maintaining a C corporation has advantages over other business types.

C Corporation: Definition

Corporations are legal entities that are viewed as independent of their shareholders. Owners of a corporation are called shareholders. A corporation offers limited liability to its shareholders that makes them responsible only to the level of their investment in the business. If the corporation encounters issues, the personal assets of the shareholders are protected by this limited liability.

Since a corporation is viewed as a separate entity, the Internal Revenue Services (IRS) considers it as an individual taxpayer. Corporations are vulnerable to double taxation because profits are taxed at the corporate level and then at the shareholder's personal tax levels after distribution of dividends. Depending on its eligibility, a business can elect an S corporation status to avoid this negative feature of a C corporation.

C corporation is a tax status under subchapter C of the IRS code that requires profits of a corporation to be taxed separately from its shareholders. On the other hand, an S corporation, under subchapter S of the IRS code, passes the profits of the corporation to the shareholders, who file their individual taxes.

Key Characteristics of a C Corporation

A C corporation, defined under Subchapter C of the Internal Revenue Code, has distinct legal and operational characteristics that set it apart from other business structures:

  • Separate Legal Entity: It exists independently from its shareholders, allowing it to enter contracts, sue or be sued, and own property in its own name.
  • Perpetual Existence: The corporation continues regardless of changes in ownership or management, offering stability for long-term planning.
  • Flexible Ownership: C corporations can have unlimited shareholders, including individuals, corporations, partnerships, and foreign investors.
  • Stock Structure: They can issue multiple classes of stock, giving flexibility in voting rights and profit distribution.
  • Regulatory Compliance: They must follow federal and state corporate formalities, including holding annual meetings, maintaining records, and filing required reports.

C Corporation: Advantages

Like any business type, operating under a C corporation status has also its set of advantages.

  • Limited liability.This feature of a corporation attracts small businesses to consider incorporating. With this, all personal assets like savings and properties won't be jeopardized if the corporation faces lawsuits or overwhelming debts. Instead of purchasing expensive liability insurance, business owners may choose to seek incorporation to protect their personal assets.
  • Raising capital.Since the corporation has stocks to offer, it is easier to raise capital than a partnership or sole proprietorship. With the idea of getting dividends from the corporation's profits, individuals are attracted to invest, meaning the business owners skip loans and avoiding high interest just to accumulate the needed capital.
  • Fringe benefits.Another advantage of a C corporation over other business types is that fringe benefits like group life insurance, employee medical expenses, health and disability insurance, and death-benefit payment can be deducted from taxes as a business expense. In order for a C corporation to use this feature, it should design a benefit that is beneficial to all employees, not only shareholders. It is recommended that at least 70 percent of the employees should get the benefit.
  • Lower risk of audit. Compared to an LLC or a sole proprietor, corporations usually have a lower risk of a government audit.
  • Profit-sharing. Since corporations have profit-sharing, the income of the corporation can be split among the shareholders, affecting their overall tax savings.
  • Unlimited number of shareholders. Corporations can sell stocks to individuals, making the number of their shareholders unlimited, which equates to more capital.
  • Foreign nationals as shareholders.While some business types restrict the ownership of a business to U.S. citizens only, a C corporation allows any nationality to own and invest in the business. This also allows the flow of foreign money into the investment.
  • Can issue different classes of stock. C corporations can also issue different classes of stocks to the shareholders. This will lure different types of investors because they have options when it comes to what class of stock to invest in.

Additional Benefits for Growth and Investment

Beyond the standard advantages, C corporations offer benefits particularly valuable for businesses seeking to expand:

  • Access to Capital Markets: C corporations can issue shares to raise substantial capital, and they are eligible to list on public stock exchanges.
  • Attracting Institutional Investors: Venture capitalists and private equity firms often prefer investing in C corporations due to clear governance and exit strategies.
  • Enhanced Credibility: The “Inc.” designation can improve a company’s reputation with clients, suppliers, and lenders.
  • Tax-Deductible Benefits: In addition to fringe benefits, corporations can deduct certain operational costs, including employee bonuses and retirement plan contributions, as business expenses.

C Corporation: Disadvantages

Some of the drawbacks to consider in having a C corporation include:

  • Double taxation.C corporations file taxes at the corporate level. Once corporation income is distributed to its shareholders, shareholders file their individual taxes. This means that C corporations experience double taxation.
  • Bureaucracy and expense.Since corporations are governed by federal and state laws, they are required to employ lawyers and accountants for legal and tax preparations. Stockholder and board directors meetings are also required, and minutes of the meeting must be kept.
  • Rules governing dividends distribution.Profits are shared based on the stock holdings of the company. If a shareholder owns 20 percent of the corporation's stock, he may only get 20 percent of the profits.
  • Expensive to start. When filing for articles of incorporation, there are many fees to be settled, including state fees.

Operational and Compliance Requirements

Operating as a C corporation involves ongoing responsibilities that may be burdensome for smaller businesses:

  • Extensive Record-Keeping: Corporations must maintain detailed records of meetings, bylaws, stock issuances, and financial statements.
  • Formal Governance: The board of directors must meet regularly, adopt resolutions, and oversee major corporate decisions.
  • Regulatory Oversight: Compliance with federal securities laws, state corporate statutes, and industry-specific regulations is mandatory, especially for publicly traded companies.
  • Filing Complexity: Tax returns for C corporations (Form 1120) are more complex, often requiring professional preparation to ensure accuracy and compliance.

Frequently Asked Questions

  1. What does "C corporation defined" mean?
    It refers to a business entity taxed separately from its owners under Subchapter C of the IRS Code, with profits taxed at both corporate and individual levels.
  2. Can a C corporation have foreign shareholders?
    Yes. C corporations can have unlimited shareholders, including foreign investors, making them attractive for international investment.
  3. How is a C corporation taxed?
    Profits are taxed at the corporate rate, and dividends paid to shareholders are taxed again on their personal returns, resulting in double taxation.
  4. What are the main advantages of a C corporation?
    They include limited liability, ease of raising capital, perpetual existence, and the ability to issue multiple classes of stock.
  5. Is a C corporation right for a small business?
    It depends on growth goals. For businesses seeking significant outside investment or planning to go public, the structure can be beneficial despite higher compliance costs.

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