What is a 'C Corporation'
A C corporation is a legal structure that businesses can choose to organize themselves under to limit their owners' legal and financial liabilities. C corporations are an alternative to S corporations, where profits pass through to owners and are only taxed at the individual level, and limited liability companies, which provide the legal protections of corporations but are taxed like sole proprietorships.
BREAKING DOWN 'C Corporation'While the double taxation of C corporations is a drawback, the ability to reinvest profits in the company at a lower corporate tax rate is an advantage. Most corporations are C corporations.
Organizing a C Corporation
Once the corporation’s name has been chosen, some states require it to be reserved with the secretary of state. The articles of incorporation must be drafted and filed with the state. Stock certificates can be issued to the initial shareholders upon creation of the business. All C corporations must file Form SS-4 to obtain an employer identification number (EIN). Although requirements vary across different jurisdictions, C corporations are required to file state, income, payroll, unemployment and disability taxes.
Maintenance of C Corporation
A C corporation is required to hold at least one meeting each year for shareholders and directors. Minutes must be maintained to display transparency in how the business operates. A C corporation must maintain the voting records for the company's directors and a list of owner's names and ownership percentages. The business must maintain the company bylaws on the premises of the primary business location. These organizations file annual reports, financial disclosure reports and financial statements.
Benefits of a C Corporation
C corporations limit the personal liability of directors, shareholders, employees and officers. Legal obligations of the business cannot become personal debt obligations of any individual associated with the business. The C corporation continues to exist even if all owners of the company are replaced. A C corporation may have any number of owners or shareholders, although it is required to register with the Securities and Exchange Commission (SEC) upon reaching certain thresholds.
The major downside of C corporations relates to the double taxation that occurs. When a C corporation generates income, it is required to file its tax return with the Internal Revenue Service (IRS). After deducting business expenses and salaries, the remaining income is subject to tax. This net income is also distributed to shareholders in the form of dividends. These dividends are income to the shareholder and are reported on the individual's tax return. Therefore, profits from a C corporation are taxed at the corporation's tax rate and individual's tax rate. Only net income retained by the C corporation temporarily avoids double taxation.