What Is a C Corporation?
If you’re looking to start a business, or if you already have one and are thinking of updating its structure, then you may be interested in learning about C corporations. There are a number of different types of corporations, and they have similarities and differences when it comes to how they are taxed, how they are run, how many owners they can have, etc.
This article will focus on C corporations. You’ll learn about how they are formed, governed, and taxed, as well as how profits are dispersed. We’ll also explain how C corporations are different from other types of corporations and give you an overview of the advantages and disadvantages of C corps.
By the end of our article, you’ll know everything you need to about C corps, and, if you’re a business owner, you’ll have a better sense of whether or not forming a C corp could be the right option for your company.
What Is a Corporation?
We’ve all heard of corporations and have a sense of what they are. Most people think of corporations as big businesses that sell products or services and make millions (if not billions) of dollars.
While this can be true, there’s more to the definition of a corporation. A quick Google search defines a corporation as “a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.”
This definition means that a corporation essentially has all of the rights of a person. That is, it can sue and be sued, take out loans, and own assets. It also has to pay taxes on the money it makes.
The great thing about most corporations is that because they are seen as a single entity, those who own the corporation, called shareholders, have limited liability. This means that should the company face debts, lawsuits, or any other sort of financial trouble, the shareholders’ personal assets are protected. The company’s own assets are used to pay back debts or reach settlements.
What Is a C Corporation?
All of the above general information about corporations also applies to C corporations. The name C corporation is simply used to describe any corporation that is taxed separately from its owners.
C corporations are one of the most common types of corporations. Other types of corporations include S corporations, benefit corporations (B corps), and non-profit corporations.
The main differences between the different types of corporations generally have to do with things like taxes or the corporation’s goals. We’ll talk more in detail about the differences between C corps and other corporations later in this article.
How Is a C Corporation Formed?
When forming a corporation, one must follow the laws of the state in which the corporation will reside. The process of forming a corporation is generally the same regardless of where you live, but different states have different rules for what must be included in the articles of incorporation.
To form a corporation, one must reserve their business’s name, designate a registered agent, and file articles of incorporation (for which there is a fee). The articles of incorporation typically include the corporation’s name, the number of authorized shares, the corporation’s registered agent, and the names and addresses of the incorporators.
Upon incorporation, shareholders will vote to elect a board of directors. The more shares someone has, the more votes they have. Bylaws for the company are typically written as well.
Bylaws outline how the company is to be run. They set terms of office, outline the board of directors’ responsibilities, and state how often the board of directors should have meetings.
How Are C Corps Governed?
The board of directors is largely responsible for the governing of a corporation. They are meant to act as representatives for the shareholders who elected them. Therefore, having more shares essentially means having more power over the corporation since you have more votes to put toward directors you prefer.
The board of directors has a duty to set broad goals for the company and ensure that the company has the resources it needs to meet those goals. They also elect senior executives such as company presidents, vice presidents, treasurers, and secretaries. These executives handle the day-to-day operations of the company.
An interesting aspect of C corporations is that the people who own them do not have to remain part of the corporation indefinitely. They can leave the company by selling off all of their shares, and the C corp will not dissolve.
This is because C corps are often owned by large numbers of people (anyone can buy shares, aka stocks, of a C corp) and are run by directors rather than owners. This structure allows C corps to exist indefinitely.
How Are C Corporations Taxed?
C corporations are legally considered a single entity and, as such, must pay federal income taxes. Because C corps are taxed separately from their owners, they’re subject to something called double taxation.
This means that the company’s profits are first taxed at the corporate level. Then, when those profits are dispersed to shareholders via dividends, the dividends are taxed at an individual level.
This is one of the major disadvantages of a C corporation. However, there are some potential ways around double taxation. If shareholders agree to keep earnings in the business rather than take them as dividends, the tax can be avoided.
Another possible option for small C corps is to combine salary-and-distributions with a reduced taxable gain on qualifying stock sales. If a business qualifies for the Internal Revenue Code Section 1202, it may significantly reduce the taxes it owes.
How Are Profits Dispersed?
C corporations offer an unlimited growth potential through the sale of stocks. Both wealthy investors and working-class individuals can buy shares of C corps and become shareholders.
Shareholders of C corps can receive transfers of money or other assets from the company. When the company distributes these assets to shareholders, the assets are known as dividends.
Dividends can be money, properties, or more shares. The amount a shareholder can receive is dependent on how big their stake is in the company — that is, how many shares they own. It is up to the board of directors to determine if and when shareholders receive dividends.
Dividends cannot be distributed if the company has outstanding debts that it is unable to pay. However, if the company is regularly paying its debts and is not otherwise struggling financially, then shareholders can receive dividends even if the corporation is still paying back loans.
C corps can also set up preferential treatment for certain classes of shareholders in their articles of incorporation. These shareholders have priority when it comes to receiving dividends. Usually, these shareholders hold a type of stock called preferred stock.
While preferred stock will result in priority in terms of dividend payouts, it isn’t without disadvantages. While common stock gives owners a right to vote for directors, preferred stock doesn’t.
Preferred stock is less volatile than common stock, which is both good and bad. It has less chance of depreciating in value but also less chance of growing in value. Whichever type of stock a shareholder owns, they will receive dividends.
How Are C Corps Different From Other Corporations?
There are a few different types of corporations aside from C corps. It can be helpful to know the differences between them in case you are ever interested in forming a corporation.
S Corporations
S corporations are very different from C corporations in how they are taxed. C corporations are seen as their own entity and thus are charged federal income taxes at a corporate rate. S corporations are not charged federal income tax.
Instead, the shareholders who receive the profits of the S corp are taxed on a personal level. They must pay income taxes on their share of the corporation’s revenue. As you can see, the S corporation avoids double taxation.
In order for a corporation to be considered an S corp and taxed in this manner, it cannot have more than 100 shareholders. The shareholders have to be US residents and must be individuals rather than other corporations.
S corporations also cannot set any priorities when it comes to the distribution of dividends. If they did so, they would not be able to be taxed as an S corp.
Benefit Corporations
Benefit corporations, often known as B corps, are taxed in the same way as C corps, with the company being taxed separately from the shareholders. B corps also enjoy limited liability like C corps do.
However, the two are quite different when it comes to their goals, transparency, and accountability. According to Business Insider, B corporations “strive to reduce inequality, lower poverty levels, and create a healthier environment, stronger communities, and purposeful jobs.”
B corps hope to make a positive difference while still lining their own pockets. That’s what makes them different from non-profit corporations — in a B corp, there are shareholders who bring home money, whereas non-profits reinvest profits back into themselves in order to continue offering charitable services.
While some C corps will be swayed by public opinion (and money) into being more sustainable or pursuing certain humanitarian goals, this is never their original or main goal. B corps, on the other hand, are formed by people with strong beliefs about how businesses can simultaneously make money and offer positive change to communities and/or the environment.
Non-Profit Corporations
As you can guess by the name, non-profit corporations do not use the money they receive for personal gain. Though they may follow a corporate structure and be governed by a board of directors, they don’t have any shareholders because all of the money they receive is meant to be used for the public good.
Though non-profits can and do make money through sales, donations, and grants, they don’t have to pay federal income taxes. They can also be exempt from paying sales and property taxes. Non-profits are not allowed to donate money to political campaigns, or they lose these tax benefits.
As you can see, non-profit corporations have very different goals from C corps. Though they follow a similar governing structure, they don’t have much else in common.
LLCs
Though not technically a type of corporation, we still wanted to detail LLCs because they are a popular business structure, especially for small or budding businesses. As you likely know, LLC stands for limited liability company.
Just like C corps, LLCs enjoy limited liability. Should the business face financial struggles, the owners’ personal assets will not be at risk. This is the main similarity between LLCs and C corps; otherwise, they’re pretty different.
LLCs are much easier to form than C corporations and require a lot less paperwork. They’re also structured differently. They do not have a board of directors or shareholders. Instead, LLCs are managed and run by those who own them. LLCs can be owned by a single person or even hundreds of people — there are no limits on the number of owners an LLC can have.
LLCs do not get double taxed. Instead, profits are taxed as part of the owners’ personal income taxes. However, those who own or work for an LLC are typically considered self-employed and must pay self-employment taxes. Though LLCs are ordinarily taxed in the manner we just explained, they can fill out a form with the IRS and opt to be taxed like C corps or S corps.
Another interesting thing to note is that a C corporation can own an LLC as a subsidiary. The opposite is also true. LLCs can be shareholders in C corporations and own either a portion of or all of the C corp’s shares.
Advantages and Disadvantages of C Corps
Now that you know all about C corps, we’d like to briefly overview their advantages and disadvantages.
Advantages
- Limited liability and separate legal identity
- Can own LLCs
- Unlimited growth potential
- No limit to the number of shareholders
- Continued existence
Disadvantages
- Expensive to form
- Double taxation
- Complex to operate
Summarizing C Corporations
C corporations are the most common type of corporation in the United States. They are taxed separately from their shareholders and offer limited liability protection. Like most corporations, they are governed by a board of directors who set broad goals for the company and ensure the company has the resources it needs to succeed.
Though C corps are a great option for business owners who want to ensure their own assets are protected, they are subject to double taxation. This means profits are taxed at the corporate level and then again at a personal level when they are distributed as dividends.
C corps are different from other types of corporations not only in how they are taxed but also in how many shareholders they can have. There is no limit to the number of shareholders a C corp can have, and thus C corps have unlimited growth potential. Growth is achieved through the sale of stocks.
As you can see, there are many advantages and disadvantages to C corps.