C corporation definition
/What is a C Corporation?
A C corporation uses a corporate structure that is taxed directly, rather than passing income through to its owners for taxation purposes. Ownership in a C corporation is through shares, which may be in the form of common stock or preferred stock.
Advantages of a C Corporation
There are several advantages associated with forming a C corporation, which are as follows:
Low tax rate. The maximum corporate tax rate is substantially less than the tax rate charged to high-income individuals.
More cash availability. Since less cash is paid to the government, a C corporation has more cash available for other purposes, such as reinvesting profits in the business.
No shareholder liability. Since it has a corporate structure, its owners do not incur any liabilities taken on by the corporation.
Unlimited life. C corporation can survive its owners, persisting as new owners take the place of the old ones.
Multiple classes of stock. The entity can issue a variety of types of stock, such as several classes of preferred stock, which allows it to raise money more easily than other legal forms of business.
Disadvantages of a C Corporation
There are several disadvantages associated with the C corporation, including the following:
Double taxation. C Corps are taxed at the corporate level on their profits, and then shareholders are taxed again on dividends they receive. This results in double taxation, which can significantly reduce overall earnings.
Formation cost. Setting up a C Corp involves legal fees, state filing fees, and ongoing compliance costs (e.g., annual reports, meeting minutes, etc.).
Extensive compliance requirements. C Corps must file annual reports, hold regular board meetings, record minutes, and maintain financial records.
Potentially higher tax rates. Unlike pass-through entities (LLCs, S Corps), a C Corp may face higher tax rates due to corporate taxation rules.
Lack of flexibility in treatment of losses. Business losses in a C Corp do not pass through to shareholders, like they do in an S Corp or LLC.
Increased government oversight. C Corps are subject to stricter government oversight, including securities regulations if they issue stock.
State franchise taxes. Some states impose additional franchise taxes or corporate taxes on C Corps, increasing their financial burden.
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How to Form a C Corporation
A C corporation is formed by registering with the secretary of state's office for the applicable state, and issuing stock certificates to its owners. The shareholders then elect a board of directors, which governs the entity in their stead. The board hires a management team, which runs the business for them. The corporate secretary is also responsible for filing an annual report with the secretary of state's office for as long as the entity remains in business.