Corporations exist in different structures, which mostly have to do with how the IRS treats the company's taxes. The corporate tax cut from 35% to 21% and the revisions announced in IRC 1202 have suddenly made C corporations an attractive option for some businesses.
Regardless of the tax breaks, you need to consider some other factors before registering your company as a C corp. In this blog, learn all there is to know about C corporations, their advantages and drawbacks, and how they are different from S corporations.
C corporations are one of the most common types of companies in the US. It is a company owned by shareholders and run by a board of directors (elected by the shareholders). The board of directors may also appoint managers to run the company in bigger corporations.
The tax structure of a C Corporation is very different from other corporations. It stands as a separate legal entity, which means it is liable to pay taxes and sue or be sued, much like any shareholder that has invested in it.
As mandated by the IRS, a C corporation is required to pay tax at the corporate tax rate on its profits, which is 21% currently. President Joe Biden has proposed this to be raised to 28%.
The profits that pass on to the owners of a C corporation are also liable to be taxed separately based on individual tax rates, which creates an instance of double-taxation with such corporations.
It occurs when your income is taxed twice - once as corporate tax and then again as personal tax while filing individual tax returns.
The fact that C corporations are their own individual entities serves to protect their owners or shareholders from the debt and risks a corporation may accumulate or encounter.
Liabilities that pass on to the owners are limited in nature, which gives some security against losing profits or personal assets. The benefit of keeping the assets of a business separate from the personal makes C corporations the preferred choice for small enterprises.
There are three major points of difference between a C corporation and an S corporation:
C corporations are preferred because of an added layer of protection to the owners. However, there is more to this business structure than meets the eye. Let's review some pros of forming a C corp:
A C corp exists as a separate legal entity, which means the financial and legal risks it runs rest on its own shoulders; they cannot be passed on to its shareholders.
For this reason, small business owners prefer a C corporation structure - it separates personal assets from business assets. So in case the business runs into a ditch or gets sued, your individual financials will stay protected.
That said, this feature works the other way around, too. Even if major shareholders are owners of a C corporation, personal debts cannot be clubbed with the company's finances, keeping the corporation's books immune from individual tax defaulters.
C corporations typically do not have a shareholder limit - which means there is immense potential of generating liquidity should the need arise. Such a corporation can sell volume shares at any given time to raise capital.
A C corporation does not need the original owners to stick around in order to keep running. The corporation continues to function irrespective of changing owners, unlike LLCs - where if one of the owners sells their shares, the company dissolves.
This feature gives a C corporation longevity and the potential to keep growing irrespective of who runs it.
Every coin has a flip side - and the same applies to C corporations as well. Some of the major drawbacks of C corporations are:
C corporations are expensive. The cost of incorporation, based on the structure and set-up of the company, could potentially rise up to four or five digits.
In addition, depending on which state it is incorporated in, your company could incur a fee for maintenance. The kind of capital required to start and run a C corporation is a major setback for those seeking to incorporate.
The double-taxation of a C corporation is a big drawback for companies that generate limited revenue. Taxing profits at the company level, then taxing dividends at the individual level, leaves little to be used effectively for your business's growth.
C corporations are required to follow a long list of regulations and laws at every level - federal, state and local.
Reporting, bookkeeping, taxation, and tracking other legal and regulatory compliance rules thus become a matter of immense manpower investment.
It is rather daunting to juggle so much governmental paperwork when in-office operations such as annual reports and performance analytics already take up so much time. Luckily, outsourcing this documentation to a professional bookkeeping service like Fincent can be a huge time-saver.
If you are considering forming a C corporation, don't worry - it's quite simple. Here are the steps to be followed:
- Select an unregistered name for your business. Ensure that it complies with the naming rules that your state has published.
- File the formal documents for incorporation, called the Articles of Incorporation, with the Secretary of State.
- Put company stock on sale to gain shareholders and owners. The stock will be issued once the incorporation process is complete.
- File the SS-4 form to receive an Employer Identification Number (EIN).
- Next, appoint a board of directors. Proceed to issue stocks to the shareholders.
- Look up the necessary permits and licenses needed to run your business and initiate the procurement process.
C corporations come with substantial benefits for your company. With a clearly defined structure and operational protocol in place, your entity can benefit greatly from incorporating as C corporations.