What is a C-Corp?
So you might be asking, what is a C-Corp and how is it taxed? A C-Corporation is a legal structure of business in which the owners and shareholders are separate from the corporation. This means that the income made by the owner is taxed separately than the corporation. This type of corporation offers unlimited growth potential through the sale of stock; which can attract investors. There is no limit to the number of shareholders a C-Corp can have. Also, C-Corporations limit the liability of investment holders and firm owners. This is because the most they can lose is the amount of investment they put into the company if the business were to fail.
How is a C-Corp taxed?
C-Corps pay corporate income tax on earnings before they distribute their profits to the shareholders. Distributing their profits to shareholders is most commonly known as a dividend. As mentioned before, the taxation of the corporation is separate from the owners and shareholders. It is important to note though that the dividends handed out to the shareholders have to be claimed on their personal taxes. This is what is commonly known as double taxation.
How does a C-Corp operate?
A C-Corp must hold at least one annual meeting of its shareholders and board of directors. To demonstrate transparency in business operations, minutes must be kept. A C-Corp must maintain a list of the owners’ names and percentages of ownership, as well as voting records for the board of directors. Additionally, the major business location must have company bylaws on the property. Annual reports, financial disclosure reports, and financial statements must be also be filed by a C-Corp.
How does one start a C-Corp?
To start a C-Corp, you first have to think of a business name. You would have to file the articles of incorporation with the Sectary of State. This may vary depending on the state you live in since the laws may be different. The stockholders who then buy the shares of the C-Corp then go on to own the company.
Next, in order to get an employment identification number, from the IRS, all C-Corps must submit IRS Form SS-4 (EIN). C-Corps are obliged to file state, income, payroll, unemployment, and disability taxes, while specific requirements vary by jurisdiction.
Depending on the sector or industry the new firm operates in, there can be additional regulatory requirements. C-Corps must set up a board of directors to oversee administration and the overall operation of the corporation in addition to registration and tax procedures.
What are the Pros and Cons of a C-Corp?
- Owners and shareholders have a limited liability so they cannot be with legal obligations to the business when it comes to debt.
- Owners and shareholders can change and the corporation can continue to exist.
- Another pro is that C-Corps can raise capital by issuing and selling shares of stock. The ability to offer shares of stock allows the corporation to obtain large amounts of capital which may fund new projects and future expansions.
- For a C-Corp, submitting the articles of incorporation can cost more and result in higher legal costs than for other business structure.
- Additionally, they are under more regulatory scrutiny, which may result in higher legal costs for the business.
- Tax implications are another con factor. A C-Corp’s profits are effectively taxed twice: once when the business files its income taxes and once again when the profits are paid out as dividends.
- Furthermore, stockholders of a C-Corp, unlike S-Corps, cannot write off company losses on their personal tax returns.
To gain further information on C-Corps, here is a video made by QuickBooks that can help you gather more information: What Is A C-Corp?