C corporation is a distinct legal entity from its owners and has limited liability. Owners are shareholders in a C corp and are entitled to dividends.
The name C Corporation is derived from subchapter C of the Internal Revenue Code. Subchapter C is a tax designation, where the corporation pays tax on its income via Form 1120 to the IRS as federal taxes.
After paying federal taxes the remaining income is passed to the shareholders as dividends. These dividends are then added to the taxable income of shareholders (individuals) in personal tax returns and they pay personal income tax, thereby leading to double taxation.
While registering a corporation, C Corp is a default business structure. For other business entities, like S corp status and limited liability companies, you need to choose or get elected for s corporation or limited liability company as per rules and guidelines by the IRS.
What are Corporations and What Makes them Different?
A corporation is much different from a sole proprietorship, partnership, and limited liability company LLC. A C corp status business entity has a specific name designator at the end of the company name, it could be a “Corporation”, “Incorporated” or abbreviation “Corp”.
A corporation has not either been elected or is not qualified for an S Corporation tax status, under Internal Revenue Code.
A major feature of a C Corp is its separate legal entity from its owners/ shareholders. The shareholders of a C corporation enjoy limited liability protection, as the assets and liabilities of a C corp are different from those of the owners. Owners are not personally liable for any debts or obligations of a C corp.
Additionally, the stock of a C corporation is easily transferable, making it easy to liquidate a c corp. Also, as compared to S corporations and LLCs they have less compliance burden.
Examples of C Corps in the USA
Microsoft Corporation: Microsoft a well-known software company has C corporation status. The legal name is Microsoft Corporation and is a multinational corporation with its head office in Redmond, Washington. The C Corporation status allows it to shield personal assets
Apple Inc.: With its head office in California, Apple Inc., previously known as Apple Computer, Inc. is a technology multinational from the USA.
Coca-Cola: The Coca-Cola Company is a corporation formed in 1892 is a multinational beverage company.
Johnson & Johnson: With its principal executive office in New Jersey, Johnson & Johnson is a large multinational corporation involved in healthcare products.
Procter & Gamble: Registered as a corporation under the laws of the state of Ohio, The Procter & Gamble Company is an American multinational manufacturing consumer goods.
Other Examples
- McDonalds
- JPMorgan Chase
- Boeing
- AT&T
- ExxonMobil
C Corp Ownership and Operations
In a C corporation, the ownership rights are based on the number of shares or the shareholding. There is a difference between an owner and a manager thus differentiating ownership from operations (management).
The owners/ shareholders elect a board of directors who manage the business entity and generate passive income for the shareholders, thus attracting investors to pump capital.
There is no restriction on having the number of shareholders for a c corporation.
As a business structure, a C corp can easily transfer ownership/ shares, which is not the case with other business structures like S corporations and limited liability companies. Thereby C corporations can easily raise capital and are attractive to investors.
C Corp Profit Distribution
C Corporations distribute the profits to their shareholders as dividends. There is an advantage to controlling the timing and amount of the dividends, which can act as tax deferral as shareholders will be paying tax on distributed dividends in addition to personal income taxes.
The corporate taxes are paid before distributing the dividends. Individuals are taxed again for the receipt of income in their personal income tax return.
C Corp Tax Consequences
There is double taxation in the case of C Corporations.
The business income of C corporations is taxed and when the remaining profits or dividends are distributed as dividends to the owners or shareholders, then they are again included in the personal tax return of every individual.
Thus, from a tax standpoint, corporate profits are first taxed under corporate income tax laws and then again included in the taxable income via dividends received by the individual shareholders.
Currently, the corporate tax rate for C Corporations is 21% on their operating profits as of 2024.
Despite double taxation tax implications, C Corporations have the advantage of retaining profits for future investments and growth. Additionally, business expenses like employee salaries, operational costs, etc. are deducted from the business income to arrive at the taxable income and can defer taxes, thus making C Corp a better choice for easy management of finances.
Advantages of C Corporations
Personal Liability Protection: C Corporations provide limited liability protection to the shareholders. Being a distinct legal entity, a C Corp is separate from its owners. The owners are not liable for the debts and obligations of the corporation therefore it keeps the personal assets of the shareholders safeguarded.
Ease of Raising Capital: C Corporations can issue, sell, or transfer stocks easily thereby attracting investors and making it easier to raise capital than an s corp or an LLC
Tax Deductions: Especially beneficial for small business owners, a C corporation offers deductions for qualified business income, business expenses, employee expenses, contributions to pension plans, etc. thereby reducing the taxable income.
Reinvesting Profits: A C corp can reinvest corporate profits. The reinvested amount will not attract any personal income tax.
Public Perception: Business entities that issue shares enjoy more confidence from the public at large, as these corporations have to meet many regulations set forth by the SEC.
Disadvantages of C Corporations
Stringent Corporate Formalities: C Corps must hold at least one meeting every year for the management and the shareholders. The corporation has to maintain the minutes of the meetings, a list of shareholders’ names and percentages of shares held, the voting record of the directors, etc. Additionally, on reaching a certain threshold, C corps must register with the SEC.
Double Taxation Issue: This issue makes it less attractive for shareholders. Also, the shareholders cannot deduct any business losses on their tax returns, as permitted in the case of an S corporation.
Rigid Structure: The distinction between the owners and the managers of the business can result in a stalemate situation or at best can keep you away from creating a flexible business structure.
No Pass-Through Taxation: Lack of tax maneuverability in terms of pass-through taxation as seen in the case of any limited liability company and an S corporation.
How to Form and Register a C Corporation
Formation and Registration of a C Corporation
- Choose a Unique Name
Choose a distinct name that should not be taken by any other business entity and must not violate any trademark laws. The name should be legally acceptable. In many states, it is mandated to add, “Corporation”, “Incorporated”, or abbreviations like, “Corpo” or “Inc.” at the end of the name to act as a corporation name designator.
- Designate a Registered Agent
A registered agent represents the corporation to the state government for registration and follow-ups. The registered agent should have the physical addresses in the state in which the business is getting registered so that he can receive and submit documents and act as an official point of communication with the state.
- Filing Articles of Incorporation
It includes the name, objective, place (state) where the corporation will be registered, address of the registered office, and the number of authorized shares. The Articles of Incorporation are usually filed with the Secretary of State as per the State laws.
- Offer Share to the Owners
Issue shares/ stock to the initial shareholders, who are the owners. They are usually the promoters of the corporation. This will determine the ownership structure of a corporation. The stock issuance must adhere to securities laws of the state and federal government.
- File Form SS-4 for EIN (Employer Identification Number)
EIN is a nine-digit number obtained from the IRS. It is used for tax filing, opening bank accounts, hiring employees, payroll, submitting disability taxes, and other regulatory requirements. C corporations like other business entities are not required to pay social security taxes. The corporation is meant to withhold social security taxes from the employee’s salaries and remit to the government on behalf of employees.
- Appoint Board of Directors
Appoint a board of directors for the management of business operations and resolving the principal-agent dilemma. Besides, it is legally mandatory to appoint the board of directors as per the laws and business structure of a corporation.
- Frame Corporate Bylaws
It comprises internal laws, procedures, and rules for managing the internal affairs of the corporation like the schedule for shareholders’ meetings, directors’ remuneration, responsibilities, internal controls, authorizations, etc.
- Obtain Necessary Licenses and Permits
Depending on your business objective, location, and industry, you must obtain licenses from local and federal authorities.
- Tax Elections
A C corporation can elect to attain S Corp status to avoid double taxation. There are certain criteria and time frames for filing to get elected as an S-Corp.
Alternative to C Corporations
S Corps (S Corporations)
S Corps are made when a C corporation elects to get an S Corps status after meeting legal requirements as mentioned by the Internal Revenue Code. S corporations have the advantage of pass-through taxation, where profits and losses become a part of an individual’s tax return and there is no corporate tax. There is a restriction of only 100 shareholders who all should be US Citizens.
This business structure is beneficial for small businesses that are not looking for overseas operations and are relatively operating at a lower scale in the domestic markets. It is also beneficial for startups.
Limited Liability Partnership (LLP)
LLP combines the features of a corporation and a partnership. LLPs are generally opted by professional firms and mainly service providers like lawyers, bookkeepers, accountants, brokers, etc. C Corps have more ease of expansion, raising capital, transferring ownership, and easy exit options, this is not possible in the case of an LLP. The basic advantage of LLP is the tax advantages it offers along with simple operations and management.
Conclusion
C corporations can have nay number of shareholders and also have ease in selling or transferring shares, thus it becomes the choice for rapidly growing and large businesses. Though for a growing business structure, C Corps offers a better expansion platform, S Corporation is good for a small business that is eyeing domestic markets. It should be noted that a C corporation is the default before electing to an S Corp.
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Frequently Asked Questions
C corporations provide limited liability protection, potential tax advantages, and flexibility in ownership and management structure. However, they also entail double taxation on profits and extensive regulatory requirements.
Some Examples of C corporations include:
– Apple
– Microsoft
– Coca-Cola
– ExxonMobil
– Walmart
– Boeing
– Johnson & Johnson
– AT&T
– JPMorgan Chase
– McDonalds
Investors prefer C corporations due to limited liability protection, growth potential through multiple classes of stock, perpetual existence, easy transferability of shares, no limit to add members, liquidity of publicly traded shares and potential tax advantages.
The greatest disadvantage of C corporation is double taxation, where profits are taxed at both the corporate and individual levels, reducing the after-tax earnings available to shareholders.
One of the most important advantages of Class C shares is they often boast lower expenses compared to other share classes.
Yes, C corporation can issue preferred stock, providing investors with priority in dividend payments and other preferences over common stockholders.
