What is C Corporation (C Corp)?
As per tax laws governing the United States, any corporation which is not S corporation shall be considered C corporation which will have separate legal status and shall be taxed accordingly having its own articles according to which its activities shall be defined and shall be owned by the shareholders whereas its liability shall be limited.
A C Corporation is a type of business entity that is formed and regulated by the state. The policies, articles, and regulations for forming a C Corporation differ from state to state. In this type of business entity that is most prevalent, the owners or shareholders are taxed separately from the business entity. The taxing happens both at corporate and personal levels thereby leading to a double taxation situationDouble Taxation SituationDouble Taxation is a situation wherein a tax is levied twice on the same source of income. It usually occurs when the same income is taxed both at corporate as well as at the individual level..
- This Corporation is owned by shareholders who in turn elect the board of directors that undertake the responsibility of making business decisions and overseeing the policy of the business.
- Since this Corporation is considered as an independent entity, so it does not stop existing when there is a change of ownership or shareholding.
- The owners of this Corporation have limited liabilityLimited LiabilityLimited liability refers to that legal structure where the owners' or investors' personal assets are not at stake. Their accountability for business loss or debt doesn't exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies. so they are personally not liable for the debts incurred by the corporation.
- The owners or shareholders cannot be taken to court individually for any wrongdoing by the corporation.
The advantages of C Corporation are varied and as follows:
- The owners or shareholders have limited liability in this Corporation. This is valid for the directors, officers as well as the employees.
- This has perpetual existence so even if there is a change in ownership or a shareholder dies the C Company does not cease to exist.
- This has increased credibility which helps in gaining respect among the suppliers and lenders.
- This has the potential to grow in an unlimited way because of the sale of stocks.
- C Corporation does not have any limit on the number of shareholders. Only on reaching particular thresholds, a C Corporation is required to register itself with SEC under the Securities Exchange Act.
- It enjoys specific tax advantages like tax-deductible business expenses.
- Since a C Corporation does not have a sole proprietor it is at a lower risk of being audited by the government.
- It is entitled to deduct the cost of benefit as the business expense.
- This helps in splitting up the corporate profit among the owners and the corporation which leads to tax savings since the tax rate for a corporation is generally lower than that for an individual.
- Foreign individuals can own or invest in this Corporation.
- The majority owner of the shareholder of a C Corporation has a choice of issuing a variety of classes of stocksClasses Of StocksShare class is the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions. For example dividing the common stock into class A shares having the most privileged voting rights and class B shares which have less voting rights. to different shareholders. Since the variety of stocks are available, the different group of investors are attracted as common stock and preferred stock both have their own share of advantages which might be appealing to a group but not to another.
The disadvantages of C Corporation are as follows:
- Since revenue is taxed both at a corporate level and individual level there comes to play the problem of double taxation.
- This is expensive in the beginning since it has to pay a lot amount of fees that is accompanied by the filing of Articles of Incorporation. Moreover, this Corporation has to pay fees to the state in which they want to operate.
- Since the Corporation is overlooked by the State and the Government it has to follow more regulations and formalities like complex tax rules. It has more government oversight than other companies since it gets protection against debts, lawsuits, and other financial obligations.
- In this Corporation, the shareholders cannot deduct losses on their personal tax returns.
- This has a different tax structure compared to other business entities
How to Form a C Corporation?
For forming a C Corporation the following steps are to be followed:
- A legal name is first chosen and reserved as per each state regulation.
- Then the Articles of Incorporation is needed to be drafted and filed for registering with Secretary of State.
- Adequate investment of capital in the business entity is done.
- Stock certificatesStock CertificatesStock Certificate, also called a Share Certificate, is a legal document evidencing the ownership of stocks in a Company, including details like the stockholder’s name, issuing date, the total number of stocks issued, identification number, and the corporate seal & sign. are then issued to the initial stockholders.
- Business licenses and other certificates required to start operation are then applied for.
- SS-4 Form is filed or online application at the Internal Revenue Service website is given to generate Employer Identification Number (EIN).
- Keeping in mind the different requirements by different jurisdictions any other ID numbers required by the particular state where it operates are to be applied.
S Corporation vs C Corporation Differences
Here we provide you with the top 3 differences between S corporation vs C corporation –
|Differences||S Corporation||C Corporation|
|Taxation||S Corporations are pass-through tax business entities. They file an informational federal return but are not taxed at the corporate level. Here the profits or losses are passed through the business and are recorded on the owner’s personal tax file. The due tax is paid by the owner and not by the business entity.||C Corporations are considered to be separate entities and hence they are taxable. They file a corporate tax returns and pay taxes both ate corporate and personal levels when corporate income is distributed among the owners as dividends. At corporate level tax is paid first and then tax is again paid on individual level on the dividends.|
|Corporate Ownership||S Corporations have restrictions on ownership. No more than 100 shareholders are allowed and the shareholders must be US citizens. S Corporation cannot be owned by C Corporation.||C Corporations have no restrictions on ownership. So they are more flexible which allows the growth of the business, expansion of ownership or selling of the corporation.|
|Class of stock||S Corporations have only one class of stock.||C Corporations have multiple classes of stock.|
There are no restrictions on the number of shareholders in this Corporation. But on reaching certain thresholds it is required to register itself with SEC. This Corporation has the capability to obtain a large amount of capital by offering shares that help in the funding of new projects and business expansion.
This has been a guide to what is C Corporation? Here we discuss how to form C Corp along with its advantages and disadvantages. We also discuss the differences between a C Corporation vs S Corporation. You may learn more about Corporate Finance from the following articles –