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C CORPORATION FAQ
A C-Corporation refers to any corporation that is taxed separately from its owners in the USA. It is the most common type of corporation in the USA as it offers unlimited growth potential through the sale of stocks. This means that you can attract wealthy investors as well. Additionally, there isn’t any limit to the number of shares that the c-corp can have.
What does C in C Corp stand for?
A c-corporation or c-corp is a legal business structure for a corporation in which the owners or shareholders are taxed separately from the entity. The C in the “C corporation” or “C corp” stands for “corporation.” It comes from the fact that C corp income is taxed under the subchapter C of the Internal Revenue Code. It is the most prevalent of corporations and is also subjected to corporate income taxation. For a c-corp, the taxing of profits takes place both at the corporate and personal levels, creating a double taxation situation.
How a C corp is taxed?
C-corps pay taxes at the corporate level first and after that, the individual shareholders pay taxes on the dividends received by the corporation. This causes double taxation on the profits of the company. The corporate tax is paid using the form 1120. And the first $50,000 of net income is only federally taxed at a 15% rate, and the next $25,000 is taxed at a 25% rate. Different states have different rules on how they tax corporations.
And yes, the idea of double taxation can be daunting, but it is an avoidable problem. Here is how it works: One, a c-corp does not pay taxes on every dollar that it earns. Instead, they deduct their operating expenses from their revenues, reducing the business’ taxable income. For instance, if the company earned about $120,000 in revenue in a fiscal year and spent about $80,000 in operating expenses, the taxable income of the business is $40,000 and not $120,000.
Next, shareholders in the c-corp only get taxed if dividends are given to them by the company. In case a c-corp decides to not give out dividends to the shareholders, and instead retain the profits, the double taxation issue would be avoided as no dividends exist. In other words, a C-Corp will pay double taxation only if it makes profits and distributes dividends to shareholders.
What are the main benefits of filing a C Corporation?
When you are making a decision of whether or not you want to convert a company to a C-corporation, business owners need to consider if the level of paperwork and taxation structure is the right fit for the business. Incorporation adds legal protections that can help keep personal assets safe and even reduce the taxes. Additionally, you can have as many shareholders as you want in a C-corporation making it even easier for it to go public someday.
As compared to the LLCs and S-corporations, if the C-corporation faces financial losses, the shareholders would not get the hit on their tax returns which would happen for the LLCs and S-corporations. This is because both LLCs and S-corporations pass profit and losses to individuals with a stake in the company. Other benefits of the c-corp include the medical reimbursement plans that employees can receive tax-free, the opportunity to collect future expansion earnings at a lower cost, and the added ownership arrangement flexibility for venture capitalists who want to invest in the startup.
How a Corporation is managed and structured?
A corporation is normally managed and run by its directors and officers. The directors are appointed by the shareholders of the company and are responsible for the complete management and corporate governance of the company. The corporate bylaws that are created when the corporation is organized initially, tells how the directors will be elected or removed, which is normally done by a voting system. The directors appoint the officers who are responsible for all the daily operations and management of the company.
Again, the bylaws of the company would direct how the officers are elected and removed. Typically, this is done by a simple majority vote. These officers in the corporation include the president, secretary, treasurer, vice-president, and many more. The titles of the officers would depend on their roles and tasks. At times, different titles are also used for the officers, like CEO, CFO, and so on based on their roles. In a lot of states, a corporation only needs one officer and one director. This can normally be the same person. To know what your state demands, check the Secretary of State website for your state to know more.
In short, a corporation has 3 levels: Shareholders -> Directors -> Officers. In a lot of cases, especially with small businesses, one person acts as all of the above: the sole director, sole shareholder, and all of the officers. Nonetheless, the company still has the flexibility to add as many shareholders in the future to eventually add more directors and officers in the future.
How many shares of stock should my corporation have?
Every corporation is assigned the number of initial shares that can be distributed. The number of shares that are authorized can be seen on the Articles of Incorporation. To give the exact number of shares that your company should have or gets is not possible since the actual number is more or less arbitrary. We normally consider a company to start with 1000 shares with the par value of each share at 0.001 USD.
Some states charge more to form a corporation with a huge number of shares and/or high par value. Also, the number of shares assigned to the company is normally based on the industry type as well. So, no one can give you an exact number of the shares that your corporation will get once incorporated. Just so you know, regardless of the initial number of shares that the corporation gets, you can easily get more shares added later on as the company grows. So, you do not need to worry much about this.
What is the Par Value of a stock?
Par Value is a nominal dollar amount that is given to corporate shares. This doesn’t necessarily reflect their real value and is normally set at a low value, that is one dollar or one cent. The par value of a share is the minimum price at which it can be sold to the shareholders in the company. The par value has to be the same for all the shares that are in the same class. The shares can be sold to the initial shareholders in the company, at par value or more, but the price has to be the same for each of the shares sold. Not all states need a par value. Learn more about your state from your state’s official Secretary of State website, for example Nevada Secretary of State.