C Corporation
Selecting a C Corp for a new business venture requires an analysis of the pros and cons of the entity relative to your specific circumstance and needs, therefore, we have assembled a brief Q&A regarding the essentials related to the choice of a C Corporation.
C Corporation FAQs
- What is a C Corp?
- How does a C Corporation compare to an S Corporation?
- What are the main differences between a C Corporation and an S Corporation?
- What forms are required to form a C Corp?
- What is double taxation?
- What is the organizational structure of a C Corporation?
- Where should I incorporate my business?
- Is a corporation required to have a registered agent?
- What do I need to do after I form my C-Corporation?
- Can the personal asset protection provided by forming a C Corporation be taken away?
- Can a C Corp own an LLC?
- Can a C Corp own an S Corp?
What is a C Corporation?
A C Corporation (also known as a general corporation) is a unique business structure separate from its owners. Corporations are formed under the laws of a particular state and are then subject to the laws and regulations of that state. Corporations allow owners to separate and protect their personal assets from the debts and obligations of the business. In a properly formed and managed C Corporation, a creditor of the C Corporation should not affect an owner’s home, car, savings, or other personal assets.
Shareholders own a corporation and appoint a board of directors to oversee corporate decisions and policies. Directors typically elect officers to manage a C Corporation’s day-to-day affairs. Since a C Corporation has a perpetual existence, it does not dissolve if an owner dies or leaves the business.
What is a C Corporation vs an S Corporation?
Ownership of an S corporation is only available to persons who are U.S. citizens or naturalized, resident aliens. Other entities are not permitted to own shares of an s corporation. One of the pros in the pros and cons of owning an S Corporation vs. a C Corporation is the fact that S Corporation taxes are passed to the company’s owners who must report their profits and losses directly on their personal income tax return at the end of each year. Because of this, S Corporations do not have to file taxes for their business. C Corporations, however, must file taxes with both the IRS, and the owners must additionally report their company share of profits on their personal tax return.
What are the main differences between a C Corporation and an S Corporation?
C Corporations file IRS form 1120 to report corporate income to the Internal Revenue Service. The IRS taxes company profits at corporate tax rates and dividends paid to shareholders at individual tax rates. For this reason, you may hear tax professionals refer to “double taxation” of a C Corporation.
C Corporations can elect “pass-through” taxation by applying to the IRS for status as a Subchapter S Corporation (IRS form 2553). The S Corporation provides the same protection from personal liability; it is simply a tax election. Owners can report their share of profit and loss in the company on their individual tax returns. The S Corporation files IRS form 1120S to report income.
S Corporations have a number of restrictions. Most notably, only U.S. citizens or permanent residents may own an S Corporation. An S Corporation may not have more than 100 shareholders.
What Forms Are Required to Form a C Corp?
Articles of Incorporation or Certificate of Incorporation, depending on the state.
What Is Double Taxation?
C Corporations file IRS form 1120 to report corporate income to the Internal Revenue Service. The IRS taxes company profits at corporate tax rates and dividends paid to shareholders at individual tax rates. For this reason, you may hear tax professionals refer to “double taxation” of a C Corporation.
What Is the Organizational Structure of a C Corporation?
The company is owned by shareholders, who elect directors. The directors set a vision (policy) for the corporation and are responsible for the management of the corporation. The officers and managers, hired by the directors, are responsible for carrying out the policy on a day-to-day basis.
Where Should I Incorporate My Business?
Most companies form C Corporations in the state in which they will primarily operate or the state of Delaware so that they can have access to the State’s courts and business-friendly laws. Advantages of forming a C Corporation in your home state include:
- Typically the least complicated, if you only plan to operate the business in your home state.
- Avoid paying franchise taxes and filing annual reports in more than one state.
- Usually costs less to incorporate locally.
Many companies conduct business throughout the United States and abroad. A C Corporation with business locations in multiple states may incorporate in a single state, then register to do business in other states. This means that C Corporations must formally register, file annual reports, and pay annual fees in every state in which they conduct business.
Is a Corporation Required to Have a Registered Agent?
Yes. State laws require all corporations to maintain a registered address with the Secretary of State in each state where they do business. The person or company located at that address, known as the Registered Agent, must remain available during all business hours. A Registered Agent receives and forwards important legal documents and state correspondence on behalf of the business.
What Do I Need to Do After I Form My C-Corporation?
Most states require C Corporations to file annual reports and pay franchise taxes to maintain their good standing. Failure to file annual reports and pay franchise taxes can result in fines, notices, the inability to conduct business and the possible administrative dissolution of the corporation.
State laws require C Corporations to hold annual meetings of shareholders and directors and record meeting minutes. Owners and directors of a C Corporation use corporate minutes to reflect changes in management and important corporate activities.
Can the Personal Asset Protection Provided by Forming a C Corporation Be Taken Away?
Generally the owners of a corporation cannot be held liable for the debts and obligations of the corporation. There is a Veil or limited liability around the corporate assets and business which generally cannot be pierced by creditors. However, if owners treat the corporation as an extension of themselves (sometimes referred to as “disregarding the corporation form” or Piercing the Corporate Veil”) by commingling personal and corporate funds, disregarding the corporate formalities or committing then creditors can attempt to hold owners liable for the debts and obligations of the company, often referred to as “piercing the corporate veil.” The “corporate veil” can also be lost if a corporation is terminated by a state for failure to file required forms or failure to pay required fees and taxes.
Can a C Corp Own an LLC?
Since a C Corporation is its own legal identity (separate from that of its owner), it can own an interest in an LLC.
Can a C Corp Own an S Corp?
An S Corporation can own another S Corporation and operate it as a qualified S Corporation Subsidiary. However, a C Corporation cannot own an S Corporation. A C Corporation is not one of the eligible shareholders for an S Corporation.