Regular C Corporation: Everything You Need to Know
Regular C corporation is the default tax status of a business unless it applies for an S corporation status.3 min read
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.
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.
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.
If you need help with regular 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.