What is a C Corporation?
A C corporation (often referred to as C-corp) is a legal structure for businesses. It outlines specific tax and management rules that owners, or shareholders, must adhere to when setting up and running their corporate entity. Though it offers advantages, what differentiates this type of business or enterprise from others is that it is taxed separately from its shareholders; the business’s profits are taxed at both the personal and corporate levels. This means that a C Corporation is subject to double taxation.
What are the advantages of a C Corporation?
C corporations is a popular legal structure, especially for small business owners looking to start a business, or create a small business website, for a number of reasons. For instance, there are no restrictions regarding who can own shares in a C corporation and there is a separation between ownership and management. Other advantages include:
Separate legal identity: This type of corporation has its own rights, responsibilities, capabilities and liabilities. In fact, it can sue others (or be sued by others) in its own name - separate from the shareholders - as well as buy, use and own its own property, and make its own contracts. It can also lend money and invest in funds, all in its own name.
Limited liability: Just as it is a separate entity from its shareholders, so are the C corporation’s debts, obligations, and liabilities. The C corporation status protects the shareholders’ personal assets from creditors. For shareholders, their loss exposure is limited only to the amount they have invested in the corporation.
Perpetual existence: Since a C corporation has a separate legal identity from its shareholders, it has a perpetual existence. This means that the entity will continue to exist even if or after its owners pass away. Once formed, a C Corporation will exist until it is dissolved or liquidated.
Readily transferable shares: A share of C corporation stock offers economic as well as management rights. For example, when a shareholder sells shares, the buyer becomes a shareholder with both economic and management rights. This doesn’t happen in an LLC, where a shareholder can only sell his/her economic rights, not management rights, unless otherwise stipulated in the operating agreement.
Attractive to venture capitalists & investors: One advantage of a C corporation over other corporate entities is that it is widely accepted by venture capitalists and other investors as an attractive investment opportunity.
Ability to offer stock options: Typically, there aren’t restrictions on who can own stock in a C corporation unless otherwise stated in a corporation's governing documents. In contrast, tax laws restrict who can own stock in other corporations.
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What are the disadvantages of a C Corporation?
While the C corporation status provides benefits, it also has some disadvantages. Here are the two main downsides:
Double taxation: As already mentioned, a C corporation is exposed to double taxation. This means that the entity is expected to pay corporate income tax. In addition, the shareholders of a C corporation also must pay personal income taxes on the dividends they receive from their after-tax income.
More complex, formal structure: Due to corporation law requirements, C corporations need to be managed in a more formal way than other corporations. For example, with a C corporation, director and shareholder meetings are required. In addition, formal notice must be given in advance of these meetings, during which minutes must be kept, and there are also strict requirements when it comes to record-keeping.
FAQ (Frequently asked questions)
What are some examples of C corporations?
There are many famous examples, all of which are huge corporations and brands. They include Apple, Microsoft and McDonald's.
C corporation vs S corporation, what are the differences?
The main difference is in how their tax is calculated and paid. S corporation income can be taxed as part of the owner's personal income. C corporations are taxed as legal businesses. There are a number of restrictions on S corporations that don't apply to C corporations - they can only be owned by US citizens and have no more than 100 stakeholders. S corporations tend to be a better choice for small businesses, depending on their needs and type of business.