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How do I form a C corporation?
Generally, C corporations (or C-corps) are corporations in which the owners, or shareholders, pay separate taxes to the IRS. Corporate income taxation is also imposed on C corporations, which are the most common of corporations. A double taxation situation occurs when profits from the business are taxed both corporately and personally.
C-corporations are comparable to S corporations and limited liability companies (LLCs), which separate a company’s assets from its owners, but have different legal structures and tax treatment. Among the newer types of organizations are B-corporations (or benefit corporations). They’re for-profit companies, but aren’t taxed differently from C-corporations in terms of purpose, accountability, and transparency.
This is How C Corporations Work
Shareholders of C Corporations receive dividends in the form of corporate taxes before they are distributed to them. Dividends received by shareholders are then subject to personal income tax. The ability to reinvest profits at a lower corporate tax rate is advantageous even though double taxation is unfavorable.
Shareholders and directors of a C corporation must meet at least once a year. Transparency in business operations requires maintaining minutes. A C corporation must keep voting records of its directors and a list of its owners and ownership percentages. Furthermore, the primary business location must have company bylaws. Annual reports, financial disclosure reports, and financial statements will be filed by C corporations.
A Guide to Creating a C Corporation
The process of forming a C corporation is similar to that of forming other types of business entities. Establishing one involves the following steps:
- Choose an unregistered business name and register it.
- Articles of incorporation must be filed with the Secretary of State according to the state’s laws.
- C corporations then offer stock to shareholders, who become owners.
- To obtain an employer identification number (EIN), all C corporations must file Form SS-4.1 Although requirements vary, C corporations must submit state, income, payroll, unemployment, and disability taxes. Depending on what business the new company operates in, there may be additional regulatory requirements.
- In addition to registering and paying taxes, corporations must establish a board of directors to oversee management and operations. In the principal-agent dilemma, moral hazard and conflicts of interest arise when an agent works on behalf of a principal.
C Corporation Advantages and Disadvantages
Directors, shareholders, employees, and officers of C corporations are limited in their personal liability. This prevents any individual associated with the company from becoming liable for the legal obligations of the company. As owners change and management members are replaced, the C corporation continues to exist.
Many shareholders and owners can own a C corporation. Securities and Exchange Commission (SEC) registration is required once the corporation reaches certain thresholds.2 Offering stock allows the corporation to raise large amounts of capital for future development and expansion.
It does, however, have some drawbacks. A C Corp’s articles of incorporation can be more expensive than other business structures, and legal fees can be higher as well. Also, they face greater regulatory scrutiny, which can increase legal expenses.
Additionally, tax considerations need to be taken into account. C Corporations are effectively taxed twice—once when they file their income taxes and again when they distribute dividends. Shareholders in a C corporation cannot deduct business losses on their tax returns, unlike shareholders in an S corporation.
The pros and cons of C corporations
- Director, shareholder, and other officers of a company are limited in their liability.
- Corporations can raise capital by issuing and selling stock.
- The SEC requires C Corporations to register when they reach certain thresholds.
- Compared to other business structures, they are subject to more regulation, resulting in higher legal fees.
- Business profits are double-taxed as dividends are distributed, and shareholders cannot deduct their losses.
S Corporation vs. C Corporation
- S corporations allow companies to pass on their income, deductions, and losses to their shareholders. The incorporation process for both C corporations and S corporations is similar. Taxation and ownership are the two main differences.
- Profits earned by C-corporations are effectively taxed twice, first on the company’s income taxes, then on dividends received by shareholders. Unlike C corporations, S corporations do not pay corporate income taxes. Shareholders are taxed on profits instead.
- Ownership restrictions are also greater for S-corporations. In contrast to C corporations, S corporations are limited to 100 shareholders. A C-corp, an S-corp, or a limited liability company cannot own an S-corp.
S Corporations vs. C Corporations: What’s the Difference?
Both S corporations and C corporations allow their owners and officers to be legally separate from their businesses. Taxation differs significantly between S-corps and C-corps: an S-corp is a “pass-through” entity, which means it can pass profits and tax credits on to its shareholders. Dividends and corporate income are taxed twice for C corporations.
C Corporations vs. LLCs: What’s the Difference?
Another business structure that shields its owners from liability is the limited liability company. However, LLCs are more suitable for sole proprietorships or small businesses. An LLC’s profits are not taxed directly, unlike a C corporation’s. Instead, they are passed on directly to its members.
In a nutshell
C Corporations allow the owners of a business to become legally separate from the business. Shareholders and directors are limited in their liability when a company issues shares and passes on profits.
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