What Does a C-Corporation Mean?

A C-Corporation is one of several ways in which a company is legally recognized for tax, regulatory and official purposes. Corporation C is simply a way of structuring company ownership and is different from other popular business structures, including limited liability companies (LLCs), S corporations, sole proprietors, and others.

Understanding C Corporations

C Corporation refers to the most widespread type of corporations, under which the business is taxed separately from its owners. Such a company acts as a separate legal entity, making deals on its own behalf. The internal structure is strictly defined by legislation and includes shareholders, directors, managers, and employees.

A feature typical for C Corporations is “double” taxation”.

How Do C Corporations Work?

The operation of C Corporations is rather highly formalized, which entails the obligation to comply with certain requirements. Thus, at least once a year, it is necessary to hold a directors’ and shareholders’ meeting. The results of such meetings, as well as the voting outcome, should be entered in the minutes. In addition, one should not forget about keeping an up-to-date list of shareholders and their ownership interests.

Like all established businesses, C Corporations are required to file regular reports, which include the following documentation:

• Annual reports;
• Financial disclosure reports;
• Financial statements.

Due to a large number of regulatory requirements, maintenance costs for such ventures are somewhat higher than, for example, for LLCs. Nevertheless, it is still essential to keep a close eye on record keeping and submit necessary materials to the state in a timely manner to avoid any questions from the state.

Another aspect of all C Corporations is taxes. The legislation allows such firms to reinvest profits in working capital to reduce the tax burden. However, in other respects, C Corporations often incur significant costs because of “double” taxation”. This is commonly referred to as a situation where a company’s income is taxed twice. First, a C Corporation files Form 1120 with the IRS, paying corporate income tax as a separate legal entity. Afterward, the remaining profits are distributed among the shareholders as dividends. The owners, in turn, have to report the income earned on their personal tax returns by paying income tax.

Advantages and Disadvantages of a C Corporation

The main strengths of C Corporations include the following:

• Protecting shareholders, directors, officers, and employees from personal liability. Because C Corps conduct business under its own name, no liability for its debts and obligations can apply to others;
• Broad asset-raising opportunities. By issuing shares, a company can easily obtain financing and attract investors. This makes corporations different from other business structures;
• Tax deductions. If you plan to obtain reimbursement for business expenses, a C Corporation is the best choice. This type of business entity is eligible for the largest number of tax credits;
• Stable operation. Whatever changes occur among the owners, it will not affect the work of a C Corporation, since different people manage and own it;
• Straightforward and convenient process of transferring ownership. The C Corporation ownership is confirmed by its shares, which can easily be purchased or sold.

On the other hand, C Corporations, of course, have some weaknesses to consider when choosing a business structure. Let’s look at them in a little more detail.

• Numerous formalities. Establishing and operating corporations is strictly regulated by law. The company should create and maintain a certain internal structure and follow all the rules stipulated for this type of entity;
• Startup and maintenance costs. Due to a large number of regulatory requirements, operating a C Corp can be expensive. Moreover, it requires more reporting than, for example, in the case of an LLC;
• “Double” taxation. It is a case of a company being taxed twice on its profits. First, income tax is paid by the corporation. Then, after distributing the funds as dividends, the shareholders have to pay the tax again by listing the funds on their tax returns.

What Is the Difference Between a C Corp and an S Corp?

Although a C Corporation and an S Corporation represent the same business entity of corporations, they have a number of significant differences. It may seem like a technicality, but choosing the type of corporation will affect many aspects of the business, from the number of shareholders to the tax filing requirements. Let’s take a closer look at this issue.

• Formal requirements for the establishment: It is impossible to form an S Corporation right away. First, you will need to launch a C Corporation and then apply to the IRS for a change of your company tax treatment. To obtain and maintain the S Corporation status, your business has to meet certain statutory criteria. Above all, such a venture can be located only in the USA. Besides, there are clear rules regarding who can purchase shares of an S Corporation to become its owner. Unlike a C Corporation, only residents of the state are allowed to be the owners of an S Corp. Foreign individuals, corporations, LLCs, partnerships, and certain trusts may not buy shares of an S Corporation;
• A limited number of shareholders: Unlike a C Corporation, the number of the holders of an S Corporation cannot exceed 100 people;
• Tax treatment: Like LLCs, an S Corp benefits from “pass-through” taxation. It is the main and most common reason for switching to this business model. The S Corporation’s income tax liability shifts to its owners, who report the income generated on their tax returns. On the other hand, a C Corp is subject to the corporate income tax and files a return on its own behalf. The remaining funds are then distributed among the shareholders and are taxed again at the personal level;
• Stock: If you choose an S Corporation, you can issue only one type of stock, whereas a C Corporation has no such restriction. It simplifies the process of raising additional capital and, at the same time, allows you not to give investors the right to vote.

Although both types of corporations have a lot in common, for example, the limited liability protection and the ability to issue shares, a C Corp is actually more flexible. This business structure has fewer formal requirements, as well as restrictions regarding shareholders.

First Steps in Forming a C Corp

C Corporations stand for a formal business entity, therefore, they require formal incorporation. Nonetheless, there are several other steps you need to take to comply with the law. Although the requirements may vary from state to state, the following are usually among the crucial points in starting a C Corp:

Choose the right business name

Make sure that the name meets all state requirements to avoid your application being rejected. Optionally, you may reserve your chosen name to complete the paperwork without fear that someone else will register it first.

Build an internal management structure

Unlike some other types of businesses, the owners of a C Corporation cannot change the way it is governed at will. The state requires that each C Corp has statutory governing bodies. For example, a Board of Directors, whose duties include choosing development strategies and controlling the company’s activities.

Draft and file the Articles of Incorporation

This is the primary legal document containing all the basic information about the organization. It serves as the ground for the Secretary of State to enter a corporation into the state’s database.

Hold a first meeting of the Board of Directors

This appointment usually involves such matters as the need to open a bank account, choosing officers, and so forth.

Issue of share certificates

When creating a corporation, the company should issue shares, which can be purchased by the original owners. It will determine the ratio of ownership interests in the company among the shareholders. Furthermore, the certificates serve as proof of the owner’s ownership and determine their other rights, such as voting, transferring, etc.

Obtain licenses and permits

To get started, a business is likely to need one or more licenses. Their type and number will vary depending on the company’s activities, as well as its location;

Get an EIN

Employer Identification Number is a special 9-digit code assigned to a business by the IRS to facilitate the process of finding the company’s tax records. You need it to pay your business taxes and open a bank account. Great news! The EIN application is completely free. One can file the Form SS-4 online in a couple of minutes and start using an EIN right away.