Complete Guide of C Corporations
C corporations are actually the main type of company operating in the USA. “C corporation” or “C corp” stands for “Corporation. Other types of companies include companies that differ from the standard company type due to some structural differences (S corps, LLC, etc…) A C Corps, the most prevalent of corporation type. C-Corps have the widest range of deductions and expenses allowed by the IRS, especially for the company’s employee benefits.
A C Corporation is a way to legally recognize a business for tax, regulatory and official reasons.
C corporations limit the personal liability of directors, shareholders, employees, and officers. In this way, the business’s legal obligations cannot become a personal debt obligation of any individual associated with the company. The company continues to exist as owners change and management changes.
What are C Corporations?
C corporation is the main corporation type in The U.S. it’s a separate legal and tax-paying entity. Basically, a C Corporation is a legal entity that protects the owners’ personal assets from creditors. A C corporation’s assets, profits & losses are tied to the company, not its shareholders.
A C corporation is a company type that sells shares of stock to investors to become shareholders or owners of the company. C corporations are also known as “C Corp.”
Definition Of C Corporation
A “C Corporation” is a company that pays a calculated tax based on its company income. C corps name comes from the fact it’s defined in subchapter C of the first chapter within the Internal Revenue Code.
C-Corps have a structure that operates in a three-tier and hierarchical order. In the first level, the company owners, the shareholders, in the second level, the board of directors that decides how the company will be managed, and in the third level, the company’s employees. C Corporations are legally required to hold board meetings and shareholder meetings. C Corporations publish annual reports; regular company records are kept, and they fulfill their responsibilities, such as taxes to be paid.
According to some, “C Corporation” is not a business type but a tax status. In fact, according to U.S. company definitions, all companies are C Corporations at the stage of establishment. However, at the incorporation stage, when the Form 2553 is filled, and the request to convert to S Corp is notified to the U.S. Revenue Service, the company will be out of the “C” status, which is the subordinate status. Another exception is to complete Form 501(c) for tax-exempt status. C corporations have legal personalities that are independent of their shareholders, and therefore the directors and shareholders of the company have limited liability over the company.
Structure of a C Corporation
a) Shareholders: Shareholders own the company’s stock and are responsible for electing the corporation directors, amending the bylaws and articles of incorporation. The sole authority to dissolve a C Corporation is the shareholders. In addition, the shareholders make important decisions such as mergers and the sale of company assets.
b) Officers: The board of directors selects officers of the C corporation, such as the secretary, treasurer, and president. These officers are responsible for making the corporate decisions that govern the Corporation’s operation. These officers are Chief Executive Officer (CEO), Chief Financial Officer (CFO), Treasurer, President, Vice president, and Secretary.
c) Employees: Who works on behalf of the company for a specific salary. Employees work for a company in exchange for wages or some other agree-to compensation.
In C corporations, company owners have limited liability. Company owners and shareholders elect a board of directors and delegate the implementation of company policies and management of the company to the board of directors. The board of directors selects senior managers such as the CEO and CFO for effective leadership. These officers manage and perform day to day management of the company. In short, in C corps, shareholders do not manage the company. Profit and loss belong to the company. Due to the separate legal personality, leaving this type of partnership is easy for shareholders to transfer shares and cut ties with the company. Often publicly traded companies are seen as C Corporations.
Benefits of a C Corporation
C corporations provide limited liability protection to the company owners, meaning they are typically not directly responsible for business debts and liabilities. C corps owners are called shareholders, so their ownership interest depends on the part of their corp shares. The fact that type C Companies are separate legal entities provides many advantages to company owners.
- Separate legal identity
- limited liability
- perpetual existence
- Ownership and management are separated
- Transferable shares
- Unlimited Shareholders
- Outside Investors
- Frequently preferred by the venturers and other investors
- There are no restrictions on who can own shares
- Offers stock options
- Tax planning advantages
- Established legal precedents
A C corporation is a legal way business owners can organize themselves to be protected as a corporation but taxed as an individual entity. C corps was founded on a principle that reflects the free entrepreneurial spirit of the U.S. economy. The partnership structure is stipulated by offering advantages for cooperation and for entrepreneurs to come together. The entrepreneur will be responsible as much as the share he has acquired due to the capital he has put forward for the established company. In this way, entrepreneurs will be able to make bolder commercial decisions to start a business without risking their assets.
On the other hand, the entrepreneur can partner in more than one company in proportion to his financial power. Another advantage is that the partner or shareholders of the company will be able to start a business again, as they would not have lost everything if the company went bankrupt.
C Corporation vs. S Corporation
- A C Corporation pays an amount of tax calculated on its income. With S Corporations, the situation is different: S Corporation passes both gains and losses directly to shareholders for tax purposes. That is, shareholders of a C Corporation receive only a share of the company’s profits, are exempt from losses, and their risk is equal to the value of their investment. To give an example, the shareholder may lose as much as the value of his shares, i.e., only lose his investment. On the other hand, S Corporation shareholders have a stake in both the profits and losses of the company. That is, they are also responsible for the company’s losses. If a C Corporation goes bankrupt, its investors lose their investment but are not personally liable for its debts.
- C-Corporation offers the advantage of stopping the dividend payment by resolution of the board of directors and paying low Corporation tax. An S corp is a type of Corporation that is subject to partnership-style taxation by the IRS. In other words, in S corps, the company profit is shown by the partners as personal income. The company is not subject to tax. S corporations allow shareholders to avoid income taxes. With the decision of the board of directors, a corporation can transform from C to S or from S to C corporation at certain time intervals in terms of taxation.
- To own an S corp, the U.S. Citizens or U.S. residents condition. That is, the S corps shareholder must either be a U.S. citizen or a foreigner residing in the U.S. There is no such requirement for C corp owners and shareholding.
- C corps has no restrictions on ownership when it comes to corporate ownership, giving C corps unlimited growth potential. An S corporation can have a maximum of 100 shareholders by law. There is no such limitation in C corps.
- Besides, S corps cannot be owned by a C corp, other corps, LLCs, and other partnerships. C corporations have no limits on the number of shareholders and also the shareholder identities. Anyone or any asset could be a shareholder of C corps.
How C Companies Work
C companies earn a profit due to their income and expenses through the sale of goods and services or other profitable services during a specific period. Company expenses are standard expense items such as salaries of employees, rents paid for company buildings and vehicles, payments made for purchasing goods and services, and general operating expenses. Consequently, at the end of a calendar year, a C corporation may distribute dividend income to its shareholders if it is making a profit (unless a board decision is made not to pay dividends).
C Corporations pay corporate income tax on corporate earnings before distributing dividend income. Individual shareholders are subject to personal income tax on their dividend income, so C corporations have the disadvantage of double taxation.
Company A-C must hold meetings with shareholders and directors at least once a year, and records of the meetings must be kept. Meeting minutes are open to inspection, thus ensuring transparency in commercial activities. Company A C maintains books containing the share ratios and information of the company’s partners. The business must have the company charter in the primary business premises.
The IRS requires C corporations to file business income tax reports, including a record of apportionment.
C corporation: Pros & Cons
- Unlimited investors.
- It is the type of company that investors invest most in.
- Minimized health care costs.
- Double taxation of profits.
- Complexity. Lots of corporate formalities to be observed
How To Start A C Corporation
The process of setting up a C Corp involves four steps. Once you register your business as a corporation with the state, you can choose an S-corp or a C-corp.
1) Pick a name for the company
2) Get an Employer Identification Number
3) Name officers, a board of directors and draft a set of bylaws
4) Incorporate your business
C Corporations: Calculating Income Tax
Under U.S. federal income tax law, any corporation is called a C Corporation or C Corp, which is taxed differently from its members.
C-Corps have been very flexible in calculating federal income taxes. This flexibility in C Corporations is particularly evident when compared to a partnership or sole proprietorship. For example, in order for any “start-up” company to benefit from the tax system in the state of Delaware, it must make a profit for several years and declare stable income growth. Still, the situation is different in C corporations because the rights granted in C corporations other than the salary can also be shown as an expense in the company’s accounting records. In this way, non-wage payments to employees can be deducted from total profits while paying company taxes. For non-salary rights to qualify for this status, these rights must be granted to managers and company employees.
A C-Corp can provide benefits to its employees such as Health insurance, Disability insurance, Life insurance. Expenses for these items will be tax-deductible.
Salaries paid to C Corporation executives may be included in the list of expenses incurred by the company and deducted from total profits, provided that they are not above a reasonable level. C-Corp may stop the distribution of profits from developing the company with the management’s decision. In this case, double taxation arising from dividends is avoided, and the money to be paid in tax is included. The dividend income is used as capital of the company.
As a requirement of general operation in C batons, dividend income is usually distributed once a year, and the shareholders pay tax on the dividend shares they obtain.
Some companies keep the salaries of company executives and employees high, resulting in lower revenue for the company at the end of the year. As the profit rate will decreases, the “corporate tax” payment will decrease. In this way, the shareholders who own the company pay less tax than usual, as they receive some of their dividends by receiving a salary instead.
C-Corps enjoy favorable tax rates throughout the United States. They pay low taxes on their income. However, many different calculation methods allow the tax rate to vary. Companies must decide which method is beneficial for the company, management, and employees, and accounting departments must do well with their profit and loss probabilities when choosing options.
Tax Advantages & Disadvantages Of The C Corporation:
The tax benefits that arise if a company is incorporated as a C Corp, S Corp, or LLC will vary depending on the company’s state and its industry. Many people think that the C Corp company type is more suitable for large companies. But companies in a growth trend may choose C Corporation to take advantage of potential small business tax breaks. C Corporation has many benefits apart from the double taxation disadvantage.
C corporation’s profits get taxed according to the corp’s income tax rate. Sometimes, that might be an advantage for the company owners. Depending on where the C Corporation is located (state), they might find the corporate income tax rates will cost them less than the other types of companies like LLC and had to pay the individual income tax rate on owners companies.
C corporations have a wide range of tax deduction opportunities compared to LLCs or other partnership-type companies.
Benefiting from tax deductions depends on structuring your company so that it can earn these deductions, carry out company activities accordingly, and arrange financial records accordingly. It is important for the company accounting to be knowledgeable about tax regulations and tax deductions.
A double tax is the most important disadvantage of a C corporation. Briefly, double taxation occurs as follows: A C corporation’s profits are taxed when they are earned. In this way, the company pays its taxes on its income. However, when profits are paid as dividends, company owners are taxed at second times on the company owner’s individual tax returns. The C-Corp has already paid taxes on that profit, so the second tax payment is double taxed.
C-Corp Key Features
The liability relationship, which determines the relationship between C-Corporations’ company debts and company shareholders, is designed to protect company shareholders.
One of the most important features of type C companies is the protection of personal assets. The owner and shareholders of the company are not responsible for any debts or adverse events related to the company, except for their shares, and their personal assets cannot be collected for company debts.
C Corps has a different legal personality from its owners. Therefore, companies can be taxed separately from their owners. C companies can enter into contracts, and legally a party can be admitted, taken to court.
Shareholders and owners of C Corps may change with the sale of shares. Stock and bond sales can be used to raise company capital and to raise cash in company accounts.
Their boards of directors govern C corporations. The shareholders of the company elect the board of directors. Even if the company’s shareholders change, the company continues to be managed and maintained by the board of directors.
C companies can change the company type with the decision of the board of directors. For example, a C corp can be converted to a S corps with the approval of the shareholders and the decision of the board of directors.
Examples Of C Corporations
Most of the big brands and big companies we know are C corporations. There are two main reasons; more than one class of stock or more than 100 shareholders are only available for C corporations. If companies reach a specific size, it is inevitable that they will go to the stock market and increase the number of shareholders. That’s why C corps is the most advantageous option.
Amazon is a publicly-traded C corporation listed on the NASDAQ stock exchange. Amazon’s founder and executive chair of Amazon’s board, Jeff Bezos, is also Amazon’s biggest shareholder, representing approx 11% of outstanding shares.
Apple Inc. is The U.S.-based multinational technology company. Apple is a listed C-type corporation. Like other technology companies, Apple is traded on the NASDAQ stock exchange.
McDonald’s Corporation is an American fast-food company. The Vanguard Group, Inc. is the largest shareholder of Mcdonalds’ with 8.6%. The company has thousands of stores around the world with its franchise system. McDonald’s is a publicly-traded C corporation (NYSE: MCD)
General Motors is a C corporation like many other big automotive brands like Ford and Tesla. G.M. shares are traded on the NASDAQ stock exchange.
Like many giant companies in The U.S. Wal-Mart, Wal-Mart is the C corp. Like many other C corps, it is a listed company. Wal-Mart shares are traded on the New York stock exchange.
The Coca-Cola Company is U.S. based multinational beverage corporation. Coca-Cola is a C corporation. Its stock is listed on the NYSE
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