A C Corporation, also referred to as a general for-profit corporation, is a legal, taxable entity, separate from its owners.
Benefits of Forming a C Corp
Limited Liability Protection for Shareholders
A C Corporation’s shareholders’ personal liability is limited to the amount they have individually invested in the company. In contrast, owners of a sole proprietorship or partnership are personally liable for business debts and legal issues.
C Corporation Tax Flexibility
Default Tax Treatment for a C Corp – A C Corporation is a tax-paying entity; so when it makes a profit, it will be taxed on that income. You’ll often hear a C Corp’s income tax treatment referred to as “double taxation.” because first, the corporation pays taxes on its profits, and then the individual shareholders pay taxes on the dividend income they receive from the business. Note that dividend payouts to shareholders are not a deductible expense for the corporation. To avoid double taxation, some business owners choose to pay themselves a bonus at the end of the year in an amount that would have otherwise been the company’s profits. Because bonuses are considered supplemental wages (and therefore deductible for the business), they are taxable to the owners as ordinary income, but they are not taxed to the corporation. When a C Corporation breaks even, it will typically not have to remit corporate-level income tax.
S Corporation Election – Another way a corporation can avoid double taxation is to elect to be treated as an S Corporation for tax purposes. As an S Corp, the company’s profits and losses flow directly to their shareholders’ personal income tax returns. Owners’ salaries are subject to self-employment tax, but profit given to shareholders as distributions are not.
In many circumstances, a C Corporation pays taxes at a lower federal income tax rate than the individual income tax rates applicable to sole proprietorships and partnerships. Therefore, business owners who plan on investing earnings back into the business often prefer the C Corporation structure as a way of deferring or reducing their federal income tax obligations.
Other ways that a C Corporation is better positioned for growth than other business structures include:
- It may raise capital by borrowing money and selling equity.
- It has no restriction on how many owners (shareholders) it may have.
- Ownership may be transferred via the sale or distribution of stock certificates.
- It has perpetual existence; a C Corp continues indefinitely beyond the life of its owners unless it is dissolved.
A business that has “Inc.” or “Corp.” after its company name projects professionalism and may find that vendors and customers perceive it as more legitimate and trustworthy. Also, investors will often be more willing to fund a business established as a C Corporation.
C Corp Compliance Requirements
After a C Corporation is established, it must observe certain ongoing corporate formalities to maintain compliance and remain in good standing with the state.
Some of the common corporate compliance requirements a C corporation must fulfill include:
Regular meetings of its board of directors
At least one shareholders meeting each year
Recording meeting minutes
No commingling of personal and corporate assets
Although C corporations have more compliance requirements than sole proprietorships, partnerships, and LLCs, they can be well worth the additional time and effort to maintain because of the liability protection, potential tax advantages, and growth opportunities that they provide.
Costs of Incorporating
Even though forming a C Corp involves more legalities and formalities, the costs are reasonable compared to other business structures that do not offer the same level of personal liability protection, growth potential, tax flexibility, and other advantages. Businesses can keep the costs of incorporating and remaining compliant manageable by asking Cybergenix to handle this work load