A C corporation is a business entity distinguishing from other popular business structures such as Limited Liability Company (LLC), S Corporation and others. Generally, C Corporation structure is better suited for larger businesses or those with specific investing and financing plans such as publicly trade shares, Initial Public Offering IPOs. Due to its regulatory compliance and legal ownership formality, a C Corporation is more appealing to potential investors, financing companies, venture capitalists and shareholders.
Shareholders, who must elect a board of directors that make business decisions, implement and oversee business policies, own a C corporation. In most cases, a C corporation is required to report its financial operations to the state attorney general. Because a corporation is treated as an independent entity, a C corporation does not cease to exist when its owners or shareholders change or die.
Because the corporation is a separate entity, the Internal Revenue Service (IRS) views it as an individual taxpayer. As a result, corporations are subject to double taxation, which means that the profits are taxed separately from its owners under subchapter C of the Internal Revenue Code, once on the corporate level and a second time when they are distributed as dividends to the shareholders. If a business is eligible, it may elect S corporation status upon incorporation to avoid this drawback of C corporations.
Another major characteristic of a C corporation is that its owners/shareholders have limited liability protection. Thus, they do not stand personally liable for debts incurred by the corporation encouraging business investment and risk taking. They cannot be sued individually for corporate wrongdoings and their liability is limited to the extend of their investment in the corporation.
A C Corporation must meet certain legal requirements:
Appoint a board of directors. The board of directors selects officers who manage the day to day activities of the corporation. The board of directors also drafts bylaws for the corporation. These are written protocols that state the way that the corporation will be governed.
Assign Certain Positions in the Corporation. A C-Corporation will need to have all of the following positions. In a small C Corp, one person could hold multiple of these positions.
Officers: The corporation must have a president, secretary, and treasurer. These officers are responsible for making the day-to-day decisions that govern the corporation’s operation.
Directors: They manage the corporation and are responsible for issuing stock, electing officers and making the corporation’s major decisions.
Shareholders: They own the company’s stock and are responsible for electing directors, amending the bylaws and articles of incorporation and approving major actions taken by the corporation like mergers and the sale of corporate assets. They alone are allowed to dissolve the corporation.
Employees: They receive a salary in return for their work for the corporation.
Launch your business today from $49 + State Fee.
FREE 1st Year
SEE DETAILED PRICING
Common questions for C-Corp.
View all C-Corp FAQ
Hold an Annual General Meeting (AGM) for the shareholders and the board of directors. The annual meetings are used to discuss and decide important information, strategic decisions, opportunities, risks and issues that the corporation will need to deal with.
Keep meeting minutes. It is extremely important and a compliance requirement to keep records of all meetings, which include meeting agenda, date and time, decisions and agreement, reached at such meeting.
Keep records of shares issued to investors as ownership of the business. Ownership in a corporation is expressed through the issuance of shares. A board of directors who are elected by the shareholders governs the management of the corporation.
Limited Liability Protection. There are many benefits to operating as a C Corporation, and perhaps the most important benefit of all is the fact that C Corps provide shareholders with limited liability in terms of business losses. Since the C Corp operates as a separate and distinct legal entity, the owners and shareholders of the corporation cannot be held liable for losses or liabilities incurred upon the business. Furthermore, if a legal action is brought against the C Corp, the plaintiff(s) cannot go after the owners or shareholders personal assets. A compliant C-Corp entity means its directors, officers, shareholders, and employees of the corporation, are not personally responsible for the debts or liabilities of the business. Although the shareholders are liable up to the amount they have invested in the corporation, their personal assets cannot be touched.
Continuance of Existence. Transfer of stock or death of an owner does not alter the corporation, which exists perpetually, regardless of owners, until it is dissolved. Ownership in a C Corporation is decided by who holds the stocks issued. These stocks can be bought and sold between investors. As opposed, a sole proprietor can use a living trust or will to transfer the business to heirs. Partners frequently have insurance-funded buy-sell agreements that allow the remaining partners to continue the business.
Easy access to Investment and Raising Capital. It can be much easier for a corporation to raise capital and to attract investors than it is for a partnership or sole proprietorship, because the corporation has stocks to sell or simply can issue stocks or go public by issuing IPO’s to raise capital. Investors can be lured with the prospect of dividends if the corporation makes a profit, avoiding the necessity of taking out loans and paying high interest rates in order to secure capital.
No Ownership restrictions. C-Corp don’t have any restrictions nor limits the number of investors in the company, there can be an unlimited amount of investors. This is unlike the S Corp, which can only have 100 investors. The C Corp can also issue an unlimited amount of shares. However, if the C Corp has $10 million in assets and 500 or more shareholders, the company must register with the Securities And Exchange Commission (SEC). It also does not have any restriction on residency or citizenship restrictions allowing foreign nationals to form and have ownership in an C-Corp.
Tax Deduction Benefits. A C Corporation has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits, such as group term life, health and disability insurance. A C-Corp can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including the owner/shareholder, are exempt from paying taxes on the value of those benefits, as opposed to flow-through entity, such as an S Corporation, LLC or LP. In each of those cases the entity may write off the costs of the benefits, but any employee/shareholder who owns more than 2% of the entity will pay taxes on the value of their benefits received as it is perceived as additional income by the IRS. To be eligible for this tax break the corporation must not design a plan that benefits only the shareholders/owners. A good portion of the employees (usually 70 percent) must also be able to take advantage of the benefits. So, if having the maximum deductions and all of the employee fringe benefits on a tax-free basis is relevant, a C-Corp may be the best entity choice.
Double Taxation. The most often-cited disadvantage of using a C-Corporation is the “double-taxation” issue. Double-taxation only happens when a C-Corp distribute yearend profits or retained earnings to the shareholders as a dividend. The C-Corp has already paid taxes on that profit at corporate level tax rates for the corresponding year, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates.
Dividend Distribution Governing Rules. A corporation’s profits are divided on the basis of stockholdings. Strict rules, though, govern the way corporation’s divide their profits, even to the point, in some states, of determining how much can be distributed in dividends. Usually, all past operations must be paid for before the corporation’s directors can declare a dividend. If this is not done, and the corporation’s financial stability is put in jeopardy by the payment of dividends, the directors can, in most states, be held personally liable to creditors.
Compliance Requirements and Expenses. Federal and State statutes govern corporations. Government oversight of C Corps is greater due to the complex tax laws and higher protection provided to owners of such corporations. C-Corps and S-Corps are subject to state compliance requirements, mandated annual filing and corporate formalities. C-Corps are required to hold annual meetings of directors and shareholders adopt bylaws, keep minutes of all meetings and formal corporate resolutions and at least an annual meeting of directors and shareholders. In order to abide by all of the sometimes-complex regulations related to C corporations, it is often necessary to hire lawyers and accountants to assist with business compliance and tax preparation. Regular stockholder and board of directors meetings must be held and detailed minutes of those meetings must be kept. All of the actions taken by a corporation are to be approved by its directors and this necessity can reduce a company’s ability to take quick action on pressing matters. No matter what your business needs are, we are here to assist you from formation to operation. Get a free consultation from our partner.
Still have questions ?
and enjoy our services
© 2019 Fast Inc. Usa All Rights Reserved
FAST INC LEGAL DISCLAIMER