What Is a C Corporation? A Beginner’s Guide

A corporation is a legal entity created under the laws of various countries. The most notable types are companies, which can be publicly traded or privately held by individuals and other corporations that come in different forms such as C Corps (itself often called “C-Corp”)

What is a C Corporation? This beginner’s guide will take you through all the ins and outs of what makes up this type of company. You’ll also learn about how to be flexible when it comes to your business, whether that means being an LLC or just starting from scratch.

A “single owner c corporation” is a type of business entity that has one owner and can be taxed as a sole proprietorship. The major difference between this type of business and other types of corporations is that there are no shares issued in the company. Instead, all profits flow through to the individual who owns it.

A C corporation (abbreviated as C-corp) is a corporate form often adopted by bigger enterprises or those looking for investment. Many company owners who choose to form a C-corporation do so because it is required of them, such as if they have more than 100 shareholders. Others, such as individuals who run high-growth businesses, use a C-corp structure to attract investors. The most significant disadvantage of a C company is that it is taxed twice: once at the corporate level (21%) and again at the individual level.

Why Should You Form a C Corporation?

C companies may be difficult to understand. To begin, you must understand that a C company is one that does not have S corporation (S-corp) tax status. What exactly does it imply?

You may opt to be an S-corporation or a C-corporation after you’ve registered your firm as a corporation with the state. In 1958, Congress established the S-corporation (the S stands for small company) to help small firms save money on taxes. They avoid paying the corporation tax, which is now set at 21%.

Why would anybody want to own a C company and pay higher taxes if they can avoid paying them? The explanation is that high-revenue firms are ineligible for the S-corp since it was created by Congress for small enterprises.

There can be no more than 100 shareholders, no foreign stockholders, and only one class of stock, among other limitations. If you have two classes of stock (common and preferred), for example, you must form a C-corporation and pay the corporate tax of 21%. You could desire two stocks to appeal to various types of investors—Shareholders in Common have voting rights, while preferred stockholders get paid first in the event of a bankruptcy.

Another common purpose for starting a firm as a C-corp is to attract investors such as Angels or Venture Capital. C companies are chosen by investors for a variety of reasons, including the opportunity to issue preferred shares and make an initial public offering (IPO) if the company succeeds.

Who Should Use C Corporations?

• Larger corporations: Unlike S corporations, which are restricted to 100 stockholders, C corporations have no restrictions on the number of shareholders they may have.
• Businesses with foreign shareholders: A C corporation’s stockholders do not have to be US residents. S corporation stockholders, on the other hand, must be US citizens or residents.
• Businesses owned by another company, LLC, or trust: Unlike a S corporation, a C corporation may be owned by another corporation, LLC, or trust.
• Businesses having a variety of stockholders include: A C corporation’s shareholders may have various voting rights. You may, for example, offer your founders more voting power than subsequent investors.
• Companies that go public: C companies are the most common kind of publicly listed company since their structure allows them to have an unlimited number of stockholders. Furthermore, C companies have the ability to issue common stock with less voting rights than other stockholders.
• Businesses seeking venture financing or equity investors should form a C corporation, much like publicly listed corporations, to evade shareholder restrictions and control shareholder voting rights.

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Advantages & Disadvantages of a C Corporation

C companies provide owners with limited liability protection as well as the freedom to expand indefinitely. Classifying your company as a C corporation, on the other hand, would result in double taxes, more regulation, and greater administrative expenditures than other business forms.

Advantages of a C Corporation

• Limited liability: Corporate shareholders are generally not individually accountable for the C corporation’s debts, liabilities, and responsibilities.
• C companies, unlike S corporations, have no restriction on the number of stockholders they may have. C-corporations are a great choice for companies that want to go public or have a lot of stockholders.
• International company owners are welcome to apply: The stockholders of a C company are not restricted by their citizenship or place of residence. S companies, on the other hand, are limited to US citizens or residents as stockholders.
• Investors: Unlike S companies, C corporations are not restricted to non-entity investors. This implies that your C-corp may take money from people, partnerships, and other businesses.
• C companies may issue various classes of stock with varying voting rights, allowing for more flexible shareholder voting. Only common stock may be issued by S-corporations.
• Business expenditures that are tax deductible: A C company may deduct business expenses such as wages, rentals, advertising costs, and employee perks from its tax return.

Disadvantages of a C Corporation

• C companies are taxed twice: first on their earnings at the corporate level, and secondly as dividends on the individual tax returns of its owners.
• Setting up costs a lot of money: Aside from state-specific filing costs ranging from $50 to $500, forming a C company is a complicated procedure that may need hiring an attorney.
• C companies are heavily regulated, with tight meeting, record-keeping, and other operating requirements.
• You cannot deduct the losses of your C company on your personal tax return, unlike other business forms such as LLCs, S companies, and partnerships. These deductions are only available on the company’s tax return.

Costs of a C Corporation

Because you must prepare and submit thorough articles of incorporation, incorporation may be a costly procedure. The filing costs vary by state and range from $50 to $500. You may need to employ an attorney for $100 to $500 per hour due to the difficulties of incorporating.

Plan to pay anything from $50 for a basic company that you register yourself to more than $5,000 for a C corporation that you incorporate with the help of an attorney.

The following are the expenses of creating a C-corp:

• Fees for filing with the state range from $50 to $500.
• Fees range from $500 to $5,000.

Visit your state’s official business registration website to find out what your filing costs are. You may also learn about the documentation you’ll need to create your company on the website, which will most likely contain articles of incorporation and bylaws.

Taxes on C Corporations

Subsection C of the Internal Revenue Code governs C companies, which are taxed twice: once on corporate earnings and again on shareholder dividends reported on personal tax returns. Shareholders may face large tax costs as a result of this tax system. Even yet, by retaining as much money in the business as feasible, you may lower your tax burden.

Taxes on C-Corporations

How to Save Money on Corporate Taxes

Your C company may prevent or decrease double taxation by:

• Dividend withholding: Reduce or eliminate shareholder dividends to eliminate the second layer of taxes. Instead, put this money back into the company to save your shareholders money on taxes if they can afford to wait for dividends.
• Paying shareholders a salary instead of dividends: If your company’s earnings are largely tied to operations, instead of dividends, give your shareholders a salary. Paying a wage to your employees protects your company’s revenues from being taxed twice: first at corporate tax rates and again as taxable dividends.
• Limit salaries: If your company has a limited number of stockholders, consider giving them a little wage and keeping the profits. Profit retention lowers individual tax bills for shareholders while enabling the firm to deduct wages as a business cost.

Other company expenditures, such as employee health plan charges, equipment, and professional services like tax preparation and accounting, may also be deducted to decrease your tax obligation. Keeping track of and deducting more typical expenditures like rent, utilities, travel expenses, and other overhead costs involved with operating a business is also a good idea.

Liability Protection for C Corporations

Shareholders of a C corporation are typically not accountable for the company’s debts or obligations. Instead, their obligation is restricted to their financial stake in the company, and third parties seeking payment must turn to the company. This protection isn’t available in all cases, so make sure your company takes the necessary precautions to safeguard shareholders.

When there isn’t enough legal separation between the company and its shareholders, corporate shareholders might nonetheless be held accountable. If the company acts irresponsibly or fraudulently, non-separated shareholders may be held accountable as well. Their personal assets, including as their houses and other valuables, may be taken.

To keep liability protection for shareholders, make sure owners aren’t actively managing the firm and follow legal formalities like keeping meeting minutes. To keep company tasks distinct, have jobs available, including one for treasurer and one for secretary.

Explaining C Corporation Shareholders

Because one of the benefits of having a C-corp is the ability to have an infinite number of shareholders, it’s critical that you grasp the subtleties. There are no limits on the citizenship of a shareholder or whether it is a natural person or a business entity.

Shareholders in C corporations have different voting rights and payouts depending on whether they own ordinary or preferred stock. The right to one vote (per share) for the board of directors and other corporate decisions is granted by owning common stock in a business. This is often the publicly traded stock, such as Facebook or Apple, that you can buy on exchanges like the NYSE or Nasdaq.

Preferred stock, on the other hand, usually does not provide the holder voting rights. It does, however, usually have a set dividend that is paid before regular stock distributions. Investors and key decision-makers are the most prevalent owners of these shares (in addition to common stock).

Shareholders in Common

Common investors have different rights based on the firm. Shareholders of common stock often have voting rights proportional to their holdings. Common shareholders also have the option to acquire more stock before it is issued, allowing them to keep their ownership and voting percentage.

One disadvantage is that dividends are paid last to ordinary investors.

The common stock of a company may be split into many classes, each with its own set of voting rights.

Facebook, for example, has Class A common shares, which are traded on the New York Stock Exchange and provide one vote per share. They also offer Class B common shares, which have ten votes per share and are controlled by Facebook insiders.

Certain shareholders lose control of management choices when a stock structure like this is used. It shields the company’s officials and board of directors from potential investors.

Preferred Shareholders (Preferred Shareholders)

Instead of having voting rights in the corporation, preferred stockholders benefit from the peace of mind that comes from getting paid first. Preferred stock entitles a shareholder to fixed dividends before Shareholders in Common are paid.

Preferred investors often do not have voting rights, but they do have first access to business assets.

In periods of poor cash flow, a C company may issue preferred shares to delay payments. A C-corporation might also issue convertible preferred stock to keep the option of converting preferred shares to common stock later.

Preferred stock is a great method for a company to generate funds rapidly without handing up control of decision-making to investors. Preferred shares are popular among investors because they provide consistent dividends and are paid first in the event of a bankruptcy.

Management Structure of a C-Corporation

C companies, unlike LLCs, are required to have officers in charge of day-to-day operations. Officers’ regular management tasks typically involve carrying out the board of directors’ policies and supervising the company’s finances and records.

A President, Treasurer, and Secretary are required for any C-corporation. This information should be included in your Articles of Incorporation.

The following management are required for C corporations:

• President: The president is in charge of the company’s day-to-day operations. Signing important legal papers, interacting with other officials, and addressing high-level employment concerns are some of their responsibilities.
• Vice President: The vice president’s job is flexible, and he or she will fulfill the board of directors’ responsibilities. Several vice presidents control parts of the company such as marketing and sales in a bigger organization.
• Treasurer: The treasurer, sometimes known as the chief financial officer (CFO), is in charge of financial concerns. They’ll be in charge of financial document production and record keeping.
• Secretary: The secretary is in charge of preserving records, such as shareholder and board of directors minutes. Certain corporate documents may be requested by shareholders, and the secretary may manage the correspondence.

What Is a C Corporation and How Do I Form One?

In general, forming a company is difficult. Setting up a business requires filing state-specific articles of incorporation and obtaining a federal employment identification number (EIN). C companies are extensively regulated, so educate yourself with the regulations of your Secretary of State before forming one.

You may be able to do it yourself or utilize an online legal firm like Rocket Lawyer if you’re forming a basic C-corp with a templated Articles of Incorporation and a limited number of stockholders. If your organization is intricate, though, you should consult with a small business lawyer.

Are you forming a business on your own? The following are five steps to follow:

1. Choose a company name: The first step in forming a C corporation is to choose a name and double-check that it’s available in your state. Check your state’s official company registration website to see whether your name is available.
2. Determine your leadership structure: State laws may vary, but you’ll normally need to designate a director, who serves as a liaison between the shareholders and the board of directors. You’ll also have to choose offices, such as a president, vice president, and treasurer.
3. Create your articles of incorporation: Your state requires you to have these papers. They must contain particular information such as the company’s name, structure, and mission.
4. Make a draft of your bylaws: The bylaws, which are more informal than the articles of incorporation, describe the C-operating corp’s processes. Procedures for appointing a director, dismissing a director, and paying officers and directors will be outlined in the document.
5. Apply for tax identification numbers and business licenses: Your company must apply for federal, state, and local tax identification numbers and business licenses before recruiting staff and starting a business. This may be done on the official business registration website of your state.
6. Establish record-keeping procedures: One characteristic that distinguishes corporations from other company forms is the need for record-keeping. Ascertain that shareholder information, capital contributions, and meeting minutes are all documented.

As you can see, there are several legal stages and documentation involved in forming and maintaining a C company. It may rapidly get confusing, particularly if you don’t have any legal experience. And omitting a portion of your bylaws might lead to misunderstanding and legal concerns in the future.

If you need help forming your own C-corp, consider contacting an attorney via an online legal service such as Rocket Lawyer or a local business attorney.

Alternatives to forming a corporation in the form of a corporation in the form of

A C corporation isn’t suitable for most small firms due to double taxes and record-keeping obligations. By adopting a different company structure, you may be able to minimize your tax cost and regulatory obligations. Consider an LLC or a S company if you wish to keep your liability protection while avoiding double taxation.

Here’s a rundown of several types of company structures and who they’re great for:

• S corporation (S-corp): This is a tax status classification. S corporations may be formed by both LLCs and corporations. If you don’t choose S-corporation tax status, your company becomes a C-corporation.
• Companies that desire to reduce state administration procedures, preserve liability protection for owners, and conveniently distribute earnings and obligations among members may form a limited liability corporation (LLC).
• Owners who don’t want the inconvenience of complicated state filing requirements or legal safeguards for their personal funds might form a sole proprietorship or a partnership.

Unless your firm is very low-risk and unlikely to be sued by a client or vendor, you should register as a legal entity, such as an LLC or corporation. This should be done before you start your firm to safeguard your personal assets.

C Corporations: Frequently Asked Questions (FAQs)

What Are the Differences Between a C and a S Corporation?

S companies, unlike C corporations, are solely taxed at the individual level. S businesses may only have 100 US citizen shareholders, while C corporations can have an unlimited number of domestic and overseas investors. Finally, S businesses may only issue one kind of stock, but C corporations can issue both ordinary and preferred stock.

What’s the Difference Between an S-Corp, a C-Corp, and a Limited Liability Company (LLC)?

S and C companies, as well as LLCs, provide liability protection for owners against the company’s liabilities. LLCs and S businesses, on the other hand, are solely taxed via their owners’ personal tax returns. C-corporations are subject to two levels of taxation. If you want to keep control over how your small company is operated and taxed, form an LLC.

What Are the Tax Benefits of an S-Corp Over a C-Corp?

S firms have a considerable tax benefit in that they are taxed at the individual level rather than the corporate level. Individual shareholder returns, on the other hand, represent company earnings, losses, credits, and deductions. C companies are taxed both as a company and as individual shareholders. They are, nevertheless, favorable for corporations that provide wages to shareholders rather than dividends.

Conclusion

C companies are corporate organizations that have more flexible voting and ownership structures than S corporations and give liability protection to their owners. C companies are taxed both at the corporate and shareholder levels, although also benefit from tax breaks such as business cost deductions. If you have a big firm or want to develop swiftly with investors, you should form a C-corporation.

A “c corporation” is a type of business entity that offers limited liability to its shareholders. A c corporation is taxed as a pass-through entity. The company’s profits are not taxed, but individual investors on the company’s shareholder list pay taxes on their share of the profit. Reference: c corporation taxes.

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