- C corporations are the most common type of corporate structure in America.
- These business structures are taxed as a separate entity from the business owner(s).
- C corporations ensure owners are not held personally responsible for business debts or lawsuits.
- This article is for people who want to start a business but aren’t sure which way to structure their company.
One of the most fundamental decisions an entrepreneur makes when starting a new venture is deciding on the business structure. For those who decide against partnerships, LLCs and sole proprietorships, there’s still a decision: What type of corporation do you want to create?
C corporations – or C corps – can be a great choice because they offer owners more protection, but cost more. After all, C corps are the most common type of corporate structure in the United States. Discover more about C corporations below.
What is a C corporation?
One of the more common business structures company owners employ is a C corporation.
C corporations are businesses set up to be taxed as separate entities. They are called C corporations because they are bound by the rules and regulations of subchapter C of the Internal Revenue Code. Additionally, almost all C corporations are publicly traded companies.
The difference between a C corporation and other structures, such as an S corporation or a limited liability company (LLC), is that C corporations are required to pay both federal and state taxes. While other structures only mandate that shareholders pay taxes on any profits they receive, C corporations face the possibility of being double taxed because both the business and the owners must pay taxes on the profits.
As with other structures, however, owners of a C corporation receive limited liability protection, which guards their personal assets should the company incur debts or legal issues. In addition to S corporations and LLCs, C corporations are comparable to B corporations, which are taxed similarly but operate on different purposes, transparency and accountability.
Who owns a C corporation?
C corporations are owned by shareholders, each of whom owns stock in a company. Unlike other structures that limit the number of shareholders, C corporations can have an unlimited number of investors.
One of the shareholders main responsibilities is to elect the company’s board of directors. The board is responsible for setting the strategic direction of the company, and hiring its day-to-day leaders and company officers, which must include at least a president and secretary.
The board of directors must also attend meetings, where minutes must be recorded. While the meetings can be held more often, C corporation requirements demand at least one meeting a year for the shareholders and directors. During the meetings, shareholders may approve the company’s bylaws and any merger proposals.
In addition to electing board members, C corporations must assign someone to serve as a resident agent. The resident agent is the person responsible for a summons or petition in any lawsuits brought against the business.
Pros and cons of C corporations
Like all entities, C corporations have their pros and cons. Your organization’s circumstances determine whether the benefits outweigh the drawbacks.
Pros
- Liability protection: The structure’s limited liability ensures owners are not held personally responsible for business debts or lawsuits brought against the firm.
- Tax advantages: C corps can deduct tax expenses.
- Funds raised: Since C corporations can have an unlimited number of shareholders, they have an advantage over other structures in raising money when needed. A C corporation simply must sell more stock in the company if more capital is needed.
- Perpetuity: C corporations can live on perpetually, even as ownership changes hands with the sale of shares.
Cons
- Double tax: Under this structure, both the business and each individual owner pay taxes on profits garnered during the year. Companies can avoid double taxation by reinvesting any profits back into the business.
- Tax in all states they do business: C corporations are subject to taxes in all states in which they do business. Tax attorneys are an absolute must for C corporations, and extensive recordkeeping to demonstrate compliance with all applicable state and federal laws.
When to incorporate as a C corp
There are several situations in which incorporating as a C corp may be an advantageous business decision, including recent tax changes to liability. Here are three of the most popular situations:
1. When you desire protection
The limited liability granted to a C corporation extends to directors, officers, shareholders and employees. This means if there is debt or a suit filed against the corporation, lawyers cannot go after your personal assets to settle those debts and liability lawsuits. This is a stark contrast to sole proprietorships, in which your money and your company’s money are the same, and if the business is sued, so are you – placing your assets at risk.
2. When you want your business to last
C corporations do not dissolve when an owner leaves the business; they are separate legal entities that can withstand ownership changes. For instance, if two people own a C corp together and one decides to leave, they can sell their shares without closing the business. However, other business entities may dissolve in a similar situation.
3. When you have a limited budget
Many aspiring entrepreneurs who don’t have a large budget to start a business turn to C corporations, as they can raise capital by selling shares of stock. If you have a great business idea and can convince investors of its profitability, you’ll likely receive valuable investments.
