What Is a C Corporation?
A C corporation (or C-corp) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. C corporations, the most prevalent of corporations, are also subject to corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, creating a double taxation situation.
C-corps can be compared with S corporations and limited liability companies (LLCs), which also separate a company's assets from its owners, but with different legal structures and tax treatment. A newer type of organization is the B-corporation (or benefit corporation), which is a for-profit firm but different from C-corps in purpose, accountability, and transparency, but aren’t different in how they’re taxed.
- A C Corporation legally separates owners' or shareholders' assets and income from that of the corporation.
- C corporations limit the liability of investors and firm owners since the most that they can lose in the business's failure is the amount they have invested in it.
- C corporations are mandated to hold annual meetings and have a board of directors that is voted on by shareholders.
What is a C Corporation?
How C Corporations Work
C Corporations pay corporate taxes on earnings before distributing their profits to the shareholders in the form of dividends. Individual shareholders are then subject to personal income taxes on the dividends they receive. Although double taxation is an unfavorable outcome, the ability to reinvest profits in the company at a lower corporate tax rate is an advantage.
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 business operations. A C corporation must keep voting records of the company's directors and a list of the owner's names and ownership percentages. Further, the business must have company bylaws on the premises of the primary business location. C corporations will file annual reports, financial disclosure reports, and financial statements.
How to Create a C Corporation
Creating a C corporation is similar to the process of formalizing other types of business entities. These are the procedures for establishing one:
- Choose and register an unregistered business name.
- File the articles of incorporation with the Secretary of State according to the laws of that state.
- Next, C corporations offer stock to shareholders, who become owners of the corporation.
- Next, all C corporations must file Form SS-4 to obtain an employer identification number (EIN). Although requirements vary across jurisdictions, C corporations are required to submit state, income, payroll, unemployment, and disability taxes. There may be other regulatory requirements, depending on what business the new company works in.
- In addition to registration and tax requirements, corporations must establish a board of directors to oversee management and the operation of the entire corporation. Appointing a board of directors seeks to resolve the principal-agent dilemma, in which moral hazard and conflicts of interest arise when an agent works on behalf of a principal.
C Corporations are the most common type of corporation, versus an S Corporation or an LLC.
Advantages and Disadvantages of a C Corporation
C corporations limit the personal liability of the directors, shareholders, employees, and officers. In this way, the legal obligations of the business cannot become a personal debt obligation of any individual associated with the company. The C corporation continues to exist as owners change and members of management are replaced.
A C corporation can have many owners and shareholders. However, it is required to register with the Securities and Exchange Commission (SEC) upon reaching specific thresholds. The ability to offer shares of stock allows the corporation to obtain large amounts of capital which may fund new projects and future expansions.
However, there are some drawbacks. Filing the articles of incorporation for a C Corp can be more expensive than other business structures, and incur greater legal fees. They are also subject to greater regulatory scrutiny, which can increase the company's legal expenses.
There are also tax considerations. The profits for a C Corporation are effectively taxed twice—first when the company files its income taxes, and again when those profits are distributed as dividends. And, unlike an S-corp, shareholders in a C corporation cannot deduct business losses on their tax returns.
Pros and Cons of C Corporations
Limited liability for directors, shareholders, and other company officers.
C corps can raise capital by issuing and selling shares of stock.
C Corporations must register with the SEC upon reaching certain thresholds.
They are subject to greater regulation than other business structures, incurring higher legal fees.
Shareholders cannot deduct their losses, and business profits are double-taxed as dividends are issued.
C Corporation vs. S Corporation
An S corporation is another type of business structure that allows a company to pass its income, deductions, and losses to its shareholders. Both a C corp and an S corp offer limited liability protection, and the process of incorporation is similar for both. The main differences relate to taxation and ownership.
As explained above, one major disadvantage for C-corporations is that profits are effectively taxed twice, first on the company's income taxes, and again when shareholders receive dividends. An S corporation is a "pass-through" entity, meaning that it does not pay corporate income taxes. Instead, profits are taxed at the shareholder level.
S-corporations also have greater restrictions on ownership. While a C corporation can have an unlimited number of shareholders, an S corporation can have no more than 100 shareholders. In addition, an S-corp cannot be owned by a C-corp, other S-corps, or a limited liability entity.
President Biden's American Jobs Plan increases the tax rate for C corporations in 2022. In tax years beginning after December 31, 2021, the tax rate will increase from 21% to 28%.
The taxes are more complicated for tax years that started in 2021 but end in 2022. In that case, C corporations will pay 21%, plus an additional 7% for any income they earned in 2022.
What Is the Difference Between a C Corporation and an S Corporation?
An S corporation is similar to a C corporation, in that both allow the owners and officers of a business to be legally distinct from the business itself. However, there are important differences with regard to taxation: An S-corp is a "pass-through" entity, meaning that it can be used to pass profits and tax credits on to its shareholders. The profits of a C corp are taxed twice, first as corporate income and again as shareholder dividends.
What Is the Difference Between an LLC and a C Corporation?
A limited liability company, or LLC, is another business structure that shields its owners from the liabilities of the business entity. However, an LLC is more suited to a small business or sole proprietorship. Unlike a C corporation, the profits of an LLC are not taxed directly but are passed on directly to the company's members.
How Do You Report Income From a C Corporation?
When a C corporation pays income taxes, it should use IRS Form 1120 to report its corporate income taxes. In addition, the company may also have employment, social security, or Medicare tax liabilities.
The Bottom Line
A C Corporation is a business structure that allows the owners of a business to become legally separate from the business itself. This allows a company to issue shares and pass on profits while limiting the liability of the shareholders and directors.