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A C corporation is a type of company or small business that is owned by shareholders. Once the shareholders elect a board of directors, these individuals decide how the company will be run and are responsible for appointing management to run the company on a day-to-day basis. Small corporations often task members of the board to be members of management.
C corporations are the most common type of corporation in the U.S. because they offer unlimited growth potential through the sale of shares of stocks. Additionally, there is no limit to the number of shareholders that a C corp can have.
In a corporation, all legal and financial liability rests on the shoulders of the corporation—and not the business owners. The Internal Revenue Service (IRS) and other tax authorities think of corporations as separate taxpayers. As a result, C corps pay taxes at a special corporate tax rate, which is different from (and typically lower than) individual tax rates.
C corporations are divided into publicly held and privately held companies. Publicly held companies can sell shares to the general public and are required to disclose all financial information. On the other hand, privately held companies are not required to disclose this type of information.
It is common for C corporations to be compared to S corporations, Sole Proprietorships, and limited liability companies (LLCs), which also separate a company’s assets from its owner’s personal assets—but with different legal business structures and tax rules. Another type of organization is the B corporation (benefit corporation), which is a for-profit firm.
How does a C Corporation Function?
All corporations must pay corporate income taxes on earnings – before distributing the remaining amount to the shareholders in the form of dividends. Individual shareholders are subject to personal income taxes on the dividends they receive from distribution. While double taxation is considered a negative result, the ability to reinvest profits in the company at a lower corporate tax rate is a definite advantage.
A C corporation must hold at least one meeting each year for its shareholders and directors. Minutes must be kept at the annual meetings to ensure transparency in all business operations. In addition, a C corporation must keep voting records of the company’s directors and a list of the owner’s names and percentages. The business must keep company bylaws at the primary business location and file annual reports, financial disclosure reports, and financial statements.
Developing a C Corporation
Forming a C corporation requires a few steps. The first is to select an available business name that follows corporate naming rules developed by your state. You must register this business name by filing the Articles of Incorporation or Certificate of Incorporation with the Secretary of State, per the laws of each particular state. Keep in mind that you will need to pay the filing fee for the paperwork. The fee ranges from $100 to $800, depending on the state you incorporate in.
Next, file Form SS-4 in order to register for an employer identification number (EIN) or tax ID number. Although requirements vary, C corporations are typically required to submit state, income, payroll, unemployment, and disability taxes. In addition, corporations must establish a board of directors to oversee management and the operation of the entire corporation.
The last steps include appointing the directors of the C corporation, issuing stock to the initial shareholders of the C corporation, and obtaining licenses and permits for the business. In addition, business owners must apply for other ID numbers required by state and local government agencies. Typically, most businesses are required to pay unemployment, disability, and other payroll taxes.
Benefits and Disadvantages of a C Corporation
There are numerous benefits and disadvantages of a C corporation, which include the following:
Benefits:
–Limited liability, which applies to directors, officers, shareholders, and employees
–Perpetual existence – even if an owner leaves the company
–Enhanced credibility among suppliers and lenders
–Huge growth potential thanks to the sale of stock
Disadvantages:
–Double taxation because revenue is taxed at the corporate level and again as shareholder dividends
–Costly due to numerous fees associated with filing the Articles of Incorporation
–Many regulations because C corps experience more government oversight than other companies due to complex tax rules
–No deduction of corporate losses because shareholders can’t deduct losses on their personal tax returns
There is no question that your choice of legal entity type will impact many aspects of your startup business, such as taxation, financing, and growth strategies. Consider your organization’s needs, as well as the advantages and disadvantages of your options. This will help you decide the best fit for your business needs and goals.
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