Type C Corporation: Everything You Need to Know
A Type C Corporation can be a favorable choice for certain businesses.3 min read
2. Benefits of Operating a C Corp
3. Tax Benefits vs. Drawbacks
Type C Corporation
A Type C Corporation can be a favorable choice for certain businesses. There are two types of corporations – the C Corporation and S Corporation. A C Corp might be the right choice for you if your business wants:
• Flexibility in terms of profit-sharing
• Company earnings to remain in the business’s retained earnings account
• Flexibility in dividing the business earnings between the corporation and shareholders
• The ability to easily sell your business
• An ability to offer stock options to employees
• To own real estate
• To set salaries for shareholders and employees to further minimize Social Security and Medicare taxes
• To provide several fringe benefits to its employees and shareholders, i.e. health and medical benefits, educational assistance, life insurance, transportation costs
• To lower its risk of an IRS audit, as S Corps are generally more likely to be audited due to the fact that S Corp shareholders must pay themselves a reasonable salary
Benefits of Operating a C Corp
There are many benefits to operating a C Corp. First and foremost, one of the biggest benefits is the limited liability protection that it offers its owners (shareholders). This means that the shareholders cannot be held personally liable for the debts of the business.
Another significant benefit is the fact that the C Corp operates as a separate and distinct legal entity from its owners. Because of this, the company has separate formation documents that must be filed, particularly the Articles of Incorporation.
Unlike an LLC, partnership, or sole proprietorship, the C Corp has shareholders, directors, and officers. The shareholders own the company and hire a board of directors who oversee the corporate affairs of the business. In turn, the directors elect the officers who will manage the daily operations of the business.
The C Corp doesn’t have a limit as to how many shareholders it can have; an S Corp, however, can have only 100 shareholders. Keep in mind that once your C Corp has $10 million in assets and 500 or more shareholders, then it must register with the Securities & Exchange Commission (SEC) under the Securities Exchange Act of 1934. If you are required to register with the SEC, then your business can sell shares to several investors, which could provide additional funding to the business.
The C Corp has a perpetual existence, meaning that if a C Corp quits or transfers his or her shares to someone else, the C Corp will continue to exist. However, if this occurs in a Limited Liability Company (LLC), the business might automatically be terminated.
Tax Benefits vs. Drawbacks
While there is one major tax drawback to the C Corp, i.e. double-taxation, there are still many tax benefits to operating a C Corp. Regarding double-taxation, this means that the business and shareholders are essentially taxed twice. First, the profits of the business are taxed at the corporate level. Thereafter, any profits that were paid to shareholders via dividends will be taxed again at the personal income tax rate depending on the tax bracket the shareholder is in.
The business can enjoy tax-deductible business expenses, along with fringe benefits. For example, the C Corp can deduct the entire cost of health insurance plans for its employees-- it would be reported as a business expense for tax purposes.
Furthermore, corporations are usually at a much lower risk of being audited by the IRS as opposed to a sole proprietorship or LLC. The C Corp can also be used to split the profits among shareholders, which can result in significant tax savings for them. The tax rate for a corporation is usually less than for an individual.
Foreign nationals can own a C Corp, whereas S Corps can only be owned by U.S. citizens or permanent U.S. residents. Furthermore, there are no restrictions as to who can invest in the C Corp, which allows for a greater number of investors who can participate in the business. This can also introduce foreign interest, which could help increase profits drastically if the business begins bringing in money from investors in other countries.
Another great benefit of the C Corp is its ability to offer different classes of stock to different shareholders. This isn’t the case with S Corps as they can only offer one class of stock. Offering different classes of stock can be advantageous for investors, as both common and preferred stock can be offered.
If you need help learning more about the 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, Menlo Ventures, and Airbnb.