What are C Corporations: Everything You Need to Know
What are C corporations can be answered in a few words; when a small business chooses to incorporate, it is automatically set up as a C corporation, which is also known as a regular corporation. It is legally viewed as an individual entity with separate owners who are now shareholders.3 min read
2. Advantages of a C Corporation
3. Disadvantages of a C Corporation
What are C corporations can be answered in a few words; when a small business chooses to incorporate, it is automatically set up as a C corporation, which is also known as a regular corporation. It is legally viewed as an individual entity with separate owners who are now shareholders.
Overview of C Corporations
Because of the way the business structure works, when a corporation is sued, its shareholders are liable only to the extent of their individual investments in the corporation. Personal assets are not in jeopardy the way they would be if the business was set up as a partnership or a sole proprietorship.
Debts acquired by the corporation are also viewed as the corporation's responsibility. Once the business is incorporated, shareholders are protected by limited liability or what is known as the "corporate veil."
The Internal Revenue Service views corporations as individual taxpayers. This means the corporation's profits are taxed once at the corporate level and again when the shareholders receive their share of the dividends. The two-time taxing results in double taxation.
For businesses that are eligible, electing S corporation status when first incorporating is an option that avoids the double taxation process.
To further clarify, a C corporation is allowed to use double taxation per subchapter C of the Internal Revenue Code. An S corporation passes the profits to the shareholders and then taxed based on their personal tax return.
The stockholders who own a C corporation are responsible for electing a board of directors who oversee the policies and decisions made for the business.
Advantages of a C Corporation
- Small businesses that opt to incorporate as a C corporation do so because of the limited liability status it affords. The fear of losing one's life savings due to a lawsuit is eliminated when a business becomes a corporation.
- A shareholder is only responsible up to the amount they invested in the corporation; personal assets are not included in that figure.
- As a means of protection, incorporating serves as their liability "insurance."
- Because a corporation has stock available to sell, it is easier to raise capital versus a business structure such as a sole proprietorship or partnership.
- The prospect of dividends is a lure to investors if the corporation is profitable thus avoiding the paying the inflated interest rate of a loan.
Attracting Talented Employees
- Stock options and fringe benefits are advantages corporations have when recruiting top-talent to fill positions within the business.
- An advantage a C corporation has over S corporations and unincorporated businesses is its ability to deduct fringe benefits as a business expense from its taxes. Fringe benefits include health and disability insurance, group term life insurance, and death benefit payments up to $5,000.
- Shareholder-employees do not pay taxes on fringe benefits.
- The fringe benefits tax advantage may not work for all small businesses as the cost of these benefits is too expensive.
Continuance of Existence
- Corporations have perpetual existence. Because of its business structure as a C corporation and considered an independent entity, when shareholders or owners change or pass away, the corporation does not cease to exist. Partnerships may have agreements allowing the remaining partners to continue operating as a business, and a sole proprietorship.
Internal Revenue Audits
- Whereas limited liability companies (LLCs) and sole proprietors are at a higher risk for an audit, C corporations tend to have a lower risk for an IRS audit.
- Corporate profits are split among the corporation's owners.
- There is no limit to the number of stockholders allowed in a C corporation.
- Foreign nationals are allowed to invest in or own a C corporation.
- Different "classes" of stock can be issued by the majority shareholder of a C corporation.
Disadvantages of a C Corporation
- C corporations pay tax on profits at the corporate level after all businesses expenses have been deducted. Remaining profits are distributed to shareholders and taxes are paid at the individual level.
Bureaucracy and Expense
- State and federal statutes govern corporations. Because of the complexity of these statutes, it is often time to hire lawyers and accountants to assist when it's time to pay taxes.
- Corporations operating an interstate business are subject to taxes in other states.
Rules Governing Dividend Distribution
- Profits from a corporation are divided based on stockholdings. A partnership divides its profits based on employment in the business or the capital investment.
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