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A C corporation is a tax status, not a business entity type. In fact, all corporations are, by default, C corporations, unless they file Form 2553 with the IRS for S corporation status or file a 501(c) application with the IRS in order to request non-taxable status.
A C corporation is a separate entity from its shareholders, and therefore C corporations offer limited liability protection to Directors and shareholders.
There is flexibility in planning and strategizing your federal income taxes with a C-Corp; in fact, there is much more flexibility than in either partnerships or sole proprietorships.
A start-up will have to wait a few years, until the company earns a profit, before it can take advantage of these tax benefits. However, in a C corporation, fringe benefits can be deducted as a business expense.
In fact, fringe benefits are a key aspect to C corporations; a company can pay for employee benefits and then deduct these amounts as business expenses, and neither the owner nor the employee pay income tax on the value of the fringe benefits received.
The fringe benefits caveat, however, is that the employee benefits must be provided to an array of employees, not just the C-Corp's owners.
The benefits must also be non-discriminatory, i.e., not designed solely to benefit the owners.
70% of eligible employees must be able to take advantage of the benefits. A C-Corp can pay for the following employee benefits:
In addition, as long as the owners pay themselves reasonable salaries, their salaries can be deducted from the C-Corp's profits, thus lowering the amount of corporate tax owed. A C corporation is permitted to retain earnings in order to improve the company if it complies with the appropriate tax provisions.
First, the C-Corp deducts all business expenses, including but not limited to cost of goods, salaries, fringe benefits, interest payments and improvements. By this method, a C-Corp’s profits are balanced out by the owners' compensation, so there is little taxable income left on which the corporation must pay taxes.
However, shareholders of a C-Corp may face double taxation; the company pays taxes on its profits via Form 1120, and if profits are distributed to shareholders in the form of dividends, those shareholders must pay taxes on the dividends.
A number of C-Corps don’t pay any corporate taxes because the owners are also employees, so their salaries and bonuses (any type of compensation) can be deducted as a business expense.
Thus, one way to avoid double taxation is to pay the owners higher salaries instead of distributing dividends, but salaries are more heavily taxed than dividend distributions.
C corporations pay low taxes on retained earnings; this is unique to C Corps, and they also tend to carry a lower risk of an IRS audit than a sole proprietorship or LLC.
Ownership of a C corporation is evidenced by shares of stock in the company. Every C corporation has one class of common stock, with each share representing one vote at stockholder meetings.
The number of authorized shares in the company is decided at the inception of the company and is listed on the company's Certificate of Incorporation.
The authorized number of shares can be increased by filing an amendment to the Certificate of Incorporation with the Delaware Division of Corporations.
In addition to the first class of common stock, a C corporation may authorize other classes of stock, such as preferred stock or non-voting common stock, or a wide variety of other choices.
These classes of stock may have different rights regarding voting rights, dividend rights and may even be granted security interests in the company's assets.
If you are an employee of a C corporation and a stockholder, you are not considered to be self-employed, as you would be as a sole proprietor, a member of an LLC or an owner with more than 2% of shares in an S-Corp.
The Board of Directors possesses the exclusive right to issue shares in a C corporation. It sets any price it wants to on the shares of stock.
There are no restrictions on ownership in a C corporation - you can have as many owners as you want, and foreign nationals can own shares in a C corporation.
The C-Corp does not need to issue the total number of authorized shares; the Board of Directors can decide to hold some back in case more owners are added in the future.
A C corporation is the entity of choice for venture capital and angel investors. In 2014, nearly 89% of new IPOs were undertaken by Delaware C corporations.
Most venture capital firms will only invest in Delaware C corporations. If you have a company they want to invest in that is not a Delaware C corporation, chances are they will require you to re-incorporate in Delaware as a C corporation before they will invest.
The primary tool for raising capital is the class of stock known in the world of corporate finance as "Delaware Blank Check Preferred Stock." This is a class of stock which allows the Board of Directors to negotiate with investors and tailor a series of stock to fit the needs of both the investors and the directors. (See Delaware Blank Check Preferred Stock)
C corporations have three structural tiers, which must be comprised by shareholders, Directors and officers. Shareholders own the company; the Board of Directors oversees the corporation and makes major decisions, such as hiring officers; the officers actually run the company on a daily basis.
A C corporation must also comply with corporate formalities, such as holding shareholder and Board of Director meetings; filing annual reports; maintaining proper corporate records, such as meeting minutes (which must be kept separate from the owners' records); and paying annual fees.
Harvard Business Services, Inc. is a document filing specialist and business Formation Company. We are neither attorneys nor accountants, and this information should not to be considered either legal or accounting advice.