What is a C Corporation
Formation of a business entity could be done various ways, out of which Corporations are an integral part and are also remarkably different from the other forms of business entities like sole proprietorship, partnership business or a Limited Liability Corporation (LLC). A corporation is an independent legal entity which is separate from its members who could be the owning, managing and controlling the business. This feature gives corporation as an individual “person” for purposes of tax and the related laws. This implies that corporations will have pay taxes, can instigate lawsuits or be sued and also engage in contracts and business.
C Corporation refers to a business term which is used to differentiate this unique type of entity from others, for the reason that the profits of such entities are taxed separately in the internal revenue code under subchapter C. A C corporation is traditionally owned by the shareholders who are entitled to elect the board of directors. This board is entrusted with the responsibility of overseeing the company policies and make necessary business decisions. Therefore a C Corporation will not cease to exist, with an unfortunate death or change of any of its owners or shareholders thereby standing as an independent legal entity. A C Corporation is generally required to make reporting of its financial operations to the attorney general of the state, it is operating in.
Let’s discuss the advantages and also analyze the drawbacks associated with a C Corporation.
- The shareholders and the owners of a C corporation are highly benefited by having a limited liability as towards the business debts. This means that the shareholders are not anyway liable for the acts and losses of the Corporation and hence in case of any lawsuits, the personal assets of the owners are not claimed.
- C corporations can raise money by entertaining any number of stockholders thereby selling shares to large number of investors. This way funds required for projects can be managed.
- C Corporations can also raise additional funds by selling the stocks when the company is in a financial requirement for expansion.
- The owners of the C Corporation holds the right to issue various “classes” of stocks to various shareholders thereby grouping the stocks as common and preferred stocks that suits the preferences of the shareholders.
- Foreign investment is also attracted by a C corporation which makes diverse investors to participate in the business.
- The notable drawback in a C Corp is the concept of “double taxation”. This happens when the corporation issues dividend and pays tax on the profits and the shareholders also pay personal taxes on the dividend received. However the corporation can do a tax shelter by offering additional healthcare benefits or increased salary to the shareholders who are employees.
- Setting up and maintenance of a C-Corp involves expert assistance from tax, financial and business advisers due to its complicated tax calculating procedures.
Therefore always head to a lawyer to take suggestions on the type of organization to be formed being fully aware of their pros and cons.