A C Corporation is also referred to as a General for profit corporation. It is a separate, taxable, legal entity.
Forming a C Corporation has the following benefits and characteristics:
Positioning for growth
A C Corporation is taxed at a lower Federal Income Tax rate than individuals and sole proprietors. Therefore, business owners who plan on investing earnings back into the business often prefer the C Corporation structure as a way of deferring or reducing Federal Income Tax liability.
Main benefits of the C Corporation are:
- Ability to raise capital. A C Corporation may borrow money and sell equity to raise capital.
- Unlimited Number of Owners / Shareholders.
- Transferability of Ownership. Because the C corporation is its own entity, ownership may be transferred via the sale or distribution of stock certificates.
- Unlimited Duration. A C Corporation continues indefinitely beyond the life of its owners unless dissolved.
Asset Protection - Limited Liability
Liability of owners / shareholders is limited to the amount invested in the company. The personal assets of shareholders are usually not subject to business liabilities. In contrast, a Sole Proprietor IS personally liable for the business debts. Without the asset proteection of a corporation, the individual business owner risks his/her personal assets including their homes, cars, and personal savings and investments.
Credibility as a Business
Adding “Inc.” or “Corp.” after a company name inspires a certain level of professionalism and can elicit immediate confidence and trust.
C Corporation TaxesDouble-Taxation
C Corporation is a tax-paying entity. The concept of “Double Taxation” occurs as follows:
- Where a C Corporation earns a profit, the C corporation will be taxed.
- A shareholder must pay taxes on any dividend income received from the C Corporation.
This is “Double Taxation.” First, the corporation paid taxes on the income tax. Second, the individual shareholder paid taxes on the dividend incomde received. To clarify, the dividend payout is NOT DEDUCTIBLE for the corporation.Avoiding Double Taxation
Where a C Corporation breaks even, there will generally be no corporate-level income tax. Many small business owners break even by paying themselves a bonus at the end of the year equal to what the company's profits would otherwise have been. That bonus is usually taxable as ordinary income but is not double-taxed.
Alternatively, if you form an S Corporation you can avoid double taxation altogether by having the company's profits and losses flow directly to your personal income tax return.
Corporation must observe certain corporate formalities to maintain corporate compliance, a corporation are must (in the least):
- Hold regular meetings of the Board of Directors
- Conduct at least one Annual Meeting of Shareholders
- Avoid comingling personal and corporate assets
An LLC (or Limited Liability Company) has fewer formalities and a Sole Proprietor is not subject to Corporate formalities at all.
Costs of Incorporating
Historicaly, small business owners were discouraged from forming a corporation or LLC because of legal complexities, difficulties in corporate filings, and extensive corporate formaliites. Today, the incorporation process has been simplified.
The costs of incorporating a business are comparable to that of filing a DBA or sole proprietorship. The Benefits of incorporating, however, are substantial.Before you form a C-Corp, learn about how it compares to other business forms with the C Corporation comparison chart.