What Is a C Corp
Andrew Ancheta, a finance editor with extensive experience in cryptocurrency, NFTs, economics, and history, provides valuable insights into the definition and functioning of C corporations.
C corporations, also known as C corps, are a popular legal structure for corporations. In a C corp, the owners or shareholders are separately taxed from the entity. These corporations are subject to corporate income taxation, resulting in double taxation of profits at both the corporate and personal levels.
C corps can be compared to S corporations and limited liability companies (LLCs), as they all separate a company’s assets from its owners. However, they differ in legal structure and tax treatment. Another type of organization to consider is the B-corporation (or benefit corporation), which has distinct purposes, accountability, and transparency but shares a similar tax treatment with C corps.
Key Takeaways:
– C corporations legally separate the assets and income of owners or shareholders from that of the corporation.
– Investing in C corporations limits liability, as individuals can only lose the amount they have invested in the business.
– Annual meetings and a board of directors elected by shareholders are part of the legal requirements for C corporations.
C corporations have the advantage of paying corporate taxes on earnings before distributing profits to shareholders, who are then subject to personal income taxes on dividends. While double taxation is a drawback, the lower corporate tax rate enables reinvestment in the company’s projects.
Another benefit of C corporations is the separation between management and owners/shareholders, allowing for longer continuity, including partial ownership. The formal structure facilitates passive income for owners.
C corporations must hold annual shareholder and board meetings, maintain transparency through minutes, voting records, and a list of owners. They also need company bylaws in the primary business location and must file annual reports, financial disclosure reports, and financial statements.
To create a C corporation, you must:
1. Choose and register an unregistered business name.
2. File articles of incorporation with the Secretary of State, adhering to state laws.
3. Offer stock to shareholders.
4. Obtain an employer identification number (EIN) by filing Form SS-4. Additionally, fulfill state, income, payroll, unemployment, and disability tax obligations.
Moreover, corporations must establish a board of directors to oversee management and resolve principal-agent dilemmas.
The advantages of a C corporation include limited personal liability, the opportunity to raise capital by issuing stock, and the continuation of the corporation despite changes in ownership and management. However, drawbacks include higher costs for filing articles of incorporation and increased legal expenses due to greater regulatory scrutiny.
Tax considerations include double taxation of C corporations, the inability to deduct losses, and limitations on ownership.
Comparing C corporations to S corporations, both provide limited liability protection and similar processes for incorporation. However, C corporations face double taxation, while S corporations are pass-through entities that avoid corporate income taxes.
C corporations differ from LLCs as well. LLCs pass on profits directly to members, unlike C corporations, which face double taxation.
C corporation income taxes can be reported using IRS Form 1120, but there may be additional employment and tax liabilities to consider.
In conclusion, C corporations offer legal separation between owners and businesses, allowing for the issuance of shares and the passing on of profits with limited liability for shareholders and directors.
