What Is a C Corporation?

What is a C corporation?

A C corporation is a business set up to be taxed as a separate entity and is bound by the rules and regulations of subchapter C of the Internal Revenue Code. Additionally, almost all C corporations are publicly traded companies.

The difference between a C corporation and other structures, such as an S corporation or a limited liability company (LLC), is that a C corporation is required to pay both federal and state taxes. While other structures mandate that shareholders pay taxes only on any profits they receive, a C corporation faces the possibility of being double taxed because both the business and the owners must pay taxes on the profits.

As with other structures, however, owners of a C corporation receive limited liability protection, which guards their personal assets should the company incur debts or legal issues. In addition to S corporations and LLCs, C corporations are comparable to B corporations, which are taxed similarly but operate on different purposes, transparency and accountability.

Who owns a C corporation?

A C corporation is owned by its shareholders, each of whom owns stock in the company. Unlike other structures that limit the number of shareholders, a C corporation can have an unlimited number of investors.

One of the shareholders’ main responsibilities is to elect the company’s board of directors. The board is responsible for setting the strategic direction of the company and hiring its day-to-day leaders and company officers, which must include at least a president and secretary.

The board of directors must also attend meetings, where minutes must be recorded. While the meetings can be held more often, C corporation requirements demand at least one meeting per year for the shareholders and directors. During the meetings, shareholders may approve the company’s bylaws and any merger proposals.

In addition to electing board members, C corporations must assign someone to serve as a resident agent. The resident agent is the person responsible for a summons or petition in any lawsuits brought against the business.

Pros and cons of a C corporation

Like all entities, a C corporation has its pros and cons. Your organization’s circumstances will determine whether the benefits outweigh the drawbacks.

Pros

• Liability protection: The structure’s limited liability ensures owners are not held personally responsible for business debts or lawsuits brought against the firm.
• Tax advantages: A C corp can deduct tax expenses.
• Funds raised: Since a C corporation can have an unlimited number of shareholders, it has an advantage over other structures in raising money when needed. A C corporation simply must sell more stock in the company if more capital is needed.
• Perpetuity: A C corporation can live on perpetually, even as ownership changes hands with the sale of shares.

Cons

• Double tax: Under this structure, both the business and each individual owner pay taxes on profits garnered during the year. Companies can avoid double taxation by reinvesting any profits back into the business.
• Tax in all states they do business: A C corporation is subject to taxes in all states in which it does business. A tax attorney is an absolute must for a C corporation, as well as extensive recordkeeping to demonstrate compliance with all applicable state and federal laws.

When to incorporate as a C corp

There are several situations in which incorporating as a C corp may be an advantageous business decision, including recent tax changes to liability. Here are three of the most popular situations:

1. When you desire protection

The limited liability granted to a C corporation extends to directors, officers, shareholders and employees. This means if there is debt or a suit filed against the corporation, lawyers cannot go after your personal assets to settle those debts and liability lawsuits. This is a stark contrast to a sole proprietorship, in which your money and your company’s money are the same, and if the business is sued, so are you – placing your assets at risk.

2. When you want your business to last

A C corporation does not dissolve when an owner leaves the business; it is a separate legal entity that can withstand ownership changes. For instance, if two people own a C corp together and one decides to leave, they can sell their shares without closing the business. However, other business entities may dissolve in a similar situation.

3. When you have a limited budget

Many aspiring entrepreneurs who don’t have a large budget to start a business turn to a C corporation, as they can raise capital by selling shares of stock. If you have a great business idea and can convince investors of its profitability, you’ll likely receive valuable investments.

How to start a C corporation

If becoming a C corporation is right for your business, these are a few steps you will have to take:

1. Choose a name. The first step in setting up a C corporation is choosing a name for your business. Most states require that it isn’t similar to one already in use by another company.
2. File articles of incorporation. Once you’ve selected an original name, you must fill out and file the Articles of Incorporation form, also known as a Certificate of Incorporation, with the secretary of state’s office. The form spells out the basics of the business, including the name, address, purpose and incorporators.
3. Hold a board meeting. Once approved for incorporation, your business must hold a board of directors meeting in which minutes are recorded and corporate bylaws are drafted.
4. Obtain licenses. Before finally opening, you must obtain all the state and local licenses necessary to operate.

C corporation tax laws

C corporations are taxed differently than other business entities (though other types of businesses may choose to be taxed as C corporations if they prefer.) Here are the tax rules that apply to C corporations.

Double taxation

A C corporation must pay income tax on its net profits, unlike pass-through entities such as an LLC. in which owners pay income tax on the income they draw from the business. Then, the shareholders of a C corporation must pay income tax on the profits paid to them as dividends, which is where the term “double taxation” comes from.

C corporation tax rate

When a C corporation pays tax on its net profits, it must pay a flat rate of 21 percent. This is done by completing Form 1120, which must be filled out and filed with the Internal Revenue Service (IRS) on either a fiscal year or calendar year basis – which is up to the C corporation.

Quarterly estimated tax payments

C corporations that anticipate owing at least $500 in taxes should submit quarterly estimated tax payments to avoid a large tax bill at the end of the fiscal or calendar year. Quarterly estimated tax payments for a calendar year C corporation are due on the 15th of April June, September and December. 

Federal employment taxes

C corporations are required to withhold employment taxes much like other business entities. These include the FICA tax for Social Security and Medicare, as well as the FUTA tax for federal unemployment. Additionally, C corporations must submit payroll taxes throughout the year.

Alternative business entities to consider

If you’re not sure a C corporation is right for you, consider the following types of entities that may be more appropriate for small businesses.

Sole proprietorship

This is a business owned and operated by a single individual.

Advantages

• Simple and inexpensive to set up
• Complete control over decision-making
• Direct tax reporting on personal tax returns

Disadvantages

• Unlimited personal liability for business debts and lawsuits
• Limited access to capital and resources
• Lack of separation between personal and business finances

Limited liability company (LLC)

This is a business structure that combines the flexibility of a partnership with the limited liability protection of a corporation.

Advantages

• Limited personal liability for business debts and lawsuits
• Flexible management structure
• Pass-through taxation, avoiding double taxation

Disadvantages

• Formalities required, such as articles of organization and operating agreements
• State-specific regulations and filing requirements
• Potential for disagreements among members regarding management and decision-making

Limited partnership

This is a business with two or more owners, consisting of at least one general partner and one or more limited partners.

Advantages

• Limited personal liability for limited partners
• Ability for limited partners to invest without being involved in day-to-day operations
• Pass-through taxation

Disadvantages

• General partners bear unlimited personal liability for business debts and lawsuits
• Formalities required, including a written partnership agreement
• Limited partners may have restricted involvement in business decisions

Is a C corp designation right for you?

Generally, small business owners will opt for a sole proprietorship, partnership or LLC, but there are circumstances in which choosing a C corp may be useful. If you’re a startup that anticipates fast growth and expects to have a lot of shareholders, this could be the right choice for you. However, this designation comes with many considerations regarding structure and taxation you should weigh before opting to incorporate as a C corp. Consider the advice above and the alternative business entities available to make the best choice for your business.

Tejas Vemparala and Chad Brooks contributed to this article.