You can set up a business in different ways, from a sole-proprietorship to a general partnership, a corporation to an LLC. Corporations are exceptionally different from other forms of businesses in the way that it is a separate legal entity that is independent of the people who control, own and manage it. Since it is considered an individual entity, it is observed as a legal “person” in the view of tax laws, and can thus be involved in business and contracts, can initiate lawsuits and itself be sued.
Now the main question is what exactly is a C Corporation?
When a small business is incorporated, it is automatically a C corporation, usually known as a regular corporation. An essential characteristic of the corporation is that it is legally observed as an individual entity, which is independent of its owners, who are now shareholders. This means that if a C Corporation is sued, shareholders are only responsible for the amount of their investments in the corporation. Their personal assets are not at stake, as they would be if the business was a sole proprietorship or partnership. Any debts that the corporation may have are also viewed as the corporation’s responsibility. In other words, once the business is incorporated as a C Corporation, the shareholders are protected by the corporate veil or limited liability.
General Characteristics of C Corporation
Since the C corporation is legally a separate entity from the owners and shareholders, they cannot be held liable for any debts of the C corporation. In other words, their personal assets are not affected by the actions of the corporation.
Since C Corporation is an independent entity, its profits and losses are retained for the corporation. If the shareholders receive dividends, they will not be taxed on the company’s total income. Also in C Corporation, you can deduct employee benefits and business expenses in your tax filings.
A C corporation will exist continually, even if the owner or the shareholder dies, becomes disabled, leaves, or sells off their shares.
A C Corporation allows the shareholders to sell their stock or shares. There is no limit to the number of shareholders in a C Corporation. Also, the C corporation enables you to offer employees a stock option plan.
Requirements of C Corporation
There are various requirements that a C Corporation needs to follow, and failure to conform to these formalities result in serious consequences.
These requirements are:
- Adequate investment of capital in the corporation.
- Regular meetings of the shareholders and the directors.
- Formal issue of stocks to the initial shareholders.
- Maintaining and updating business records and transactions of a corporation that are separate from those of its owners.
Advantages of C Corporation
A C Corporation can easily raise a capital when compared to a sole proprietorship or partnership as the Corporation has stocks which can be sold. Investors can be lured with the profits made by the company and then shared as dividends, which can avoid the hassle of loans and high-rate interests.
Usually when a sole proprietor or partner invest in a business, his main fear is that his life’s savings could be risked by a lawsuit against his business or by any sudden overwhelming debts, but in the case of C Corporations this fear is eliminated. In a C Corporation, the personal assets of shareholders cannot be touched. Hence, many small owners choose this Corporation to protect themselves.
Continuance of Existence
The C Corporation is not affected by the transfer of stock or death of an owner. It can still run by other stockholders and partners.
Attracting Top-Notch Employees
In a C Corporation, it is easy to find and attract the best employees, as they can be lured by various stock options and fringe advantages.
One of the main advantages that C corporations have over S corporations and unincorporated businesses is that they may deduct fringe benefits (such as health and disability insurance, group term life insurance, death benefit payments, and employee medical expenses) from their taxes as a business expense. Also, shareholder-employees are excluded from paying taxes on the fringe bonuses they receive. For its eligibility, the corporation should not design a plan that serves only the shareholders/owners. Instead, a good portion of the employees must be able to enjoy these benefits.
Diverse Investors Can Participate
Foreign citizens have a right to own or invest in a C corporation. There is no binding on the investor’s type as in the case of an S corporation. This allows a more significant number of investors participate in the business allowing foreign money to flow in for investment.
Disadvantages of C Corporation:
Bureaucracy and Expense
There are some complex regulations that a C Corporation is expected to follow. The details of all the meetings of directors and stockholders are required. Since all the actions taken by the C Corporation needs to get approval from its directors, it may slow down the process sometimes when it is urgently required. Also, if the C Corporation does interstate business, it is subject to taxes in other states.
After deducting all the business expenses such as fringe benefits, salaries, interest payments, a C Corporation is required to pay taxes on their profits at the corporate level. If these profits are further distributed as dividends to the shareholders, they are also expected to pay taxes on that money while filing their personal tax returns. If companies plan to reinvest the profits back into the business, only then does double taxation not affect them. In the case of smaller businesses, most of the company’s profits are distributed as salaries and fringe benefits. Hence, double taxation can be avoided because no money is left over for distributing dividends.
Hence, C Corporation offers a lot of flexibility when establishing businesses which help you grow and expand. If you are still confused about any detail regarding C Corporation, you should always consult an attorney before making any decision.