What is a C corporation?

If you plan on incorporating your business (as opposed to forming a sole proprietorship or partnership, for example), you are likely considering structuring your entity as a C corp.

As the default type of corporation, a C corp can offer significant benefits, especially liability-related. However, there are also caveats and potential disadvantages, and choosing the wrong-fit entity structure for your business is sure to cause avoidable headaches and expenses down the line.

So, what exactly is a C corporation, anyway?

A C corporation, or C corp, is a type of corporation, a legal structure that separates a business entity from its owners. This is especially helpful in shielding you from personal legal liability if your business is in debt while allowing you to participate in the company’s profits.

Like all corporations, a C corp provides strong liability protection to investors, owners, and employees, and the owners, or shareholders, are taxed completely separately from the business entity. On the other hand, C-corp profits are taxed twice: first, when the corporation makes a profit, and second, when the owners report on their personal tax returns any dividends that the corporation distributes.

Although the double-taxation structure may not sound desirable, there can also be plenty of advantages to structuring as a C-corp in certain circumstances — it all depends on what works best for your business and goals.

We’ll dive deeper into the pros and cons of a C corporation below, but first, we’ll explore a common question: The difference between a C corp and another standard corporate structure, the S corporation.

What is the difference between a C corporation and an S corporation?

The C corporation is the default corporation type under IRS rules, which means that S corporations are fundamentally a variation of a C corp. Primarily, the key difference lies in how the IRS treats each type of organization for tax purposes.

While C corps are taxed twice, both at the corporate and personal level, when shareholders receive dividends, it’s called “pass-through entities,” meaning the business does not pay income tax at the corporate level. In an S corp, taxation is “passed through” to the owners or shareholders, resulting in a single, instead of double, layer of taxation.

That may sound like the better option, but once again, it isn’t quite so straightforward, and it all depends on your needs. For example, S corporations come with other restrictions, such as limitations on the number and type of shareholders, classes of stock, and transfer of shares. Moreover, S corps have a more challenging time securing equity financing, partially because of the shareholder restrictions — often, venture capital and private equity funds are ineligible.

So, although S corporations may sound more attractive on the surface, they may not be the best long-term choice for your business. If you are planning on an IPO, want to sell shares to more than a hundred people, want more flexibility in who can be a shareholder, intend to issue preferred stock, or do not plan on making distributions of income to shareholders, you would be wiser to consider a C corporation, instead.

What are the pros and cons of a C corporation?

As discussed above, a C corporation’s two most notable benefits are strong liability protection and the lack of restrictions on ownership. Other advantages include:

  • Ownership can transfer through the sale of stock.
  • C corps are separate entities from stockholders.
  • Fringe benefits are permitted for owner-officers.
  • C corps can have an ownership interest in any other business.
  • C corps may exist perpetually
  • It is easier to raise capital for a C corp
  • C corps offer a Qualified Small Business Stock tax advantage for early investors.

On the other hand, as we also touched upon above, the primary disadvantage of a C corp is the double taxation of profits. Some other cons include:

  • C corps are complex and expensive to create and maintain.
  • C corps require regular board of directors’ meetings and minutes.
  • C corps require separate tax returns.

So, when do the pros outweigh the cons?

There’s no single correct answer to that question. However, if your business has ownership in multiple other entities, has significant liability exposure, or if you intend your business to exist eternally, a C corporation might be a good fit.

Some questions you’ll want to consider:

  • Will taxation under Subchapter C result in lower taxes than Subchapter S?
  • Do you plan on an IPO, or are you seeking investors who are not individuals and United States citizens or residents?
  • Do you want shares to be freely transferable?
  • Do you want to issue preferred stock?

If you answered yes to these questions, a C corporation might be for you.

What are the requirements for a C corporation?

Although each state has slight differences in its requirements for C corporations, overall, the process of forming and maintaining one is largely consistent.

The first step is the creation and filing of Articles of Incorporation, a set of documents filed with governing bodies that declare the creation of the business and include relevant information, such as the business name and address and the amount and type of stock the business will issue.

Next, the IRS issues your business an EIN or Employer Identification Number. Upon the creation of the business, a C corporation should also issue stock to shareholders. Upon purchasing the stock, these shareholders become owners.

Once in operation, a C corporation is subject to specific rules. For example, a C corp must hold at least one meeting yearly for shareholders and directors. The meeting must be recorded in minutes, which must be maintained along with voting records and records of the owners’ names and ownership percentages.

A C corp is further required to maintain a copy of the company bylaws on the main business premises at all times, and they must file annual reports, financial disclosures, and statements. And while C corporations may have an unlimited number of shareholders, if they surpass certain thresholds, they must register with the Securities and Exchange Commission (SEC).

Lastly, but no less importantly, C corporations must be sure to pay taxes following IRS rules. That means submitting state, payroll, income, unemployment, and disability taxes.

Sound a little overwhelming? We can help! Please reach out if you would like personalized assistance in becoming a C corporation.

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