C Corp: Advantages, Taxes, How to Form

What is an C Corp?

When you decide to incorporate your business, one option for formation is a C Corp. A C Corp is a common type of corporation in the United States because it allows a business owner unlimited shareholders and attractive tax benefits.

A C Corp is like an S Corp or an LLC in that it offers liability protection for its owners. A C Corp is considered a separate entity from the owners, so an owner’s personal assets are protected in the event of a lawsuit against the company.

The biggest difference between a C Corp and an S Corp or LLC is the tax structure. C Corps are subject to federal corporate taxes which leads to a situation of “double taxing”. This may make a C Corp sound unappealing, however, C Corps also benefit from other tax advantages that are not available to S Corps or LLCs, such as the ability to carry profits and losses forward and backwards, which can help offset income in other years.

A C Corp must follow certain requirements although they are far less regulated than an S Corp. Some of these requirements include:

• Election of a board of directors
• At least one meeting per year for the directors and shareholders
• Records of minutes kept at these meetings
• Maintain voting records
• Maintain a list of all owner’s names and ownership percentages
• Have corporate bylaws
• File annual reports, financial disclosure reports, and financial statements

A C Corp, although more complicated and expensive to maintain than an LLC or S Corp, is a great option for businesses that are medium or high risk, businesses that plan on raising funds through stock sales, or a business that wants to eventually go public.

For more information about C Corps, click here.

C Corp Advantages and Disadvantages

C Corps have both advantages and disadvantages for business owners. When you are deciding how to incorporate your business, you may want to meet with a corporate lawyer to help decide which structure suits your needs. It is important to consider all the advantages and disadvantages before making your decision.

Advantages of a C Corp

• Liability Protection: Corporations offer the strongest protection against personal liability for owners. Directors, officers, shareholders, and employees are all protected under a C Corp.
• Unlimited Growth Potential: Unlike an S Corp, there are no limitations on the number of shareholders a C Corp can have. There is also no limit on the sale of stock.
• Perpetual Existence: The owner or shareholders can leave the company without effecting the company

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Disadvantages of a C Corp

• Double Tax: A C Corp, unlike an S Corp, is taxed as a corporation. This means it is subject to federal taxes as a corporation and then shareholders must pay taxes again on dividends
• Expensive Fees: There are numerous expensive fees that go along with the formation of a C Corp. This can be burdensome for a new business.
• No Deduction of Corporate Losses: Shareholders in a C Corp cannot deduct losses from their personal tax returns like shareholders of an S Corp.

For more help with choosing a business structure, read this article.

How is a C Corp Taxed?

A C Corp is taxed as a corporation and is completely separate from its owners in the eyes of the IRS. A C Corp first pays taxes at the corporate level and then each shareholder will be required to pay taxes on the dividends they received from the corporation at a personal level.

This form of double taxation is often looked at in an unfavorable light, however owners of a C Corp can take advantage of many tax benefits to offset this double tax and lower their tax burden.

Some advantages to a C Corp Tax Structure include:

1. Potential to Minimize Overall Tax Burden: Business owners can opt to only take a salary rather than taking a dividend because salaries are not taxed at a corporate rate
2. Ability to Carry Profits and Losses Forward and Backward: C Corps have flexibility in determining their fiscal year. This allows shareholders to shift income between different years and decide when to pay taxes on bonuses or when to take a loss.
3. Option to Accumulate Funds at a Lower Tax Cost: C Corps allow shareholders to retain income within the company because profits from a C Corp do not appear on a shareholder’s personal tax return.
4. Salary and Bonus Write Offs: Unlike an S Corp, the shareholders of C Corps can act as employees in the corporation and take a salary. This allows the corporation to deduct these salaries as payroll taxes. Essentially, the C Corp can pay their employees to offset any taxable profits. This allows shareholders to avoid the double tax.
5. Fringe Benefits: Fringe benefits allow a C Corp to take advantage of many large tax write-offs. The only stipulation is that the company must offer the same benefit to all employees. Some benefits eligible for write-offs include medical reimbursement plans, long term care, and disability insurance.
6. Charitable Contributions: C Corps can deduct any charitable contributions from their taxes as long as the contribution is no more than 10% of their taxable income.
7. Carry Losses Over Multiple Years: C Corps can take more operating losses than an LLC or S Corp with less scrutiny from the IRS. This is beneficial for new, growing companies.
8. Less Ownership Restrictions: While an S Corp is subject to many strict regulations set forth by the IRS, C Corp owners benefit from more flexibility and less restrictions. A C Corp can have unlimited owners, including foreign owners, and can have more than one class of stock.
9. Financing: Because C Corps are more flexible and less restrictive than an S Corp, they are more appealing for venture capitalists to invest in.

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C Corp vs. S Corp

A C Corp and an S Corp are both types of corporations and are very similar in how they are formed and run. Both corporations require a board of directors, corporate bylaws, annual meetings, and record of minutes. Both types of corporations protect their owners from personal liability and allow the sale of stock.

The two biggest differences between a C Corp and an S Corp are the tax structure and the restrictions that each corporation is subject to.

S Corps are pass-through entities so profits and losses flow through the company and are reported on the individual tax returns of the owners. In a C Corp, the business and the owners are treated as separate entities. A C Corp is subject to both corporate taxes and then owners are again taxed on dividends they received.

C Corps benefit from less restrictions than an S Corp including more flexibility with ownership regulations and stock options. Less restrictions allow a C Corp more growth potential than an S Corp. For example, an S Corp is limited to 100 shareholders that must be US citizens or permanent residents while a C Corp has no limit on shareholders, and they can be from anywhere.

Read this article to learn more about the characteristics of a C Corp.

Forming a C Corp

After you have decided to incorporate your business and you have chosen a C Corp as your business structure, you can follow these steps to form your C Corp:

1. Choose and Register a Name : You must choose a name that is not currently being used and register your name with the Secretary of State.
2. File Articles of Incorporation: Articles of incorporation must be filed with the Secretary of State and each state has different rules and filing procedures for this document.
3. Issue Stock: Upon the creation of the business, stock certificates must be issued to the initial shareholders making them official owners of the corporation.
4. Licenses and Certificates: Depending on your business and which state you are located; you may need special licenses and certificates to run your corporation. Check with your local state laws to see if this applies to your company.
5. Employer Identification Number: You will need an employer identification number or EIN to open a business bank account or hire employees. You can get your EIN through the IRS website.
6. Elect a Board of Directors: Every corporation, S Corps included, must elect a board of directors who oversee the management of the company.

If you would like more information about forming a C Corp, click here.

Get Help Creating a C Corp

Do you have questions about forming an C Corp and want to speak to an expert? Post a project today on ContractsCounsel and receive bids from corporate lawyers who specialize in C Corp formation.