A C Corporation is a completely separate tax and legal
entity from its owners, and owners who work in the business are treated and
taxed as employees of the corporation.
The "C" in C Corporation refers to a
subchapter of the tax code. C-corporations are one of the most common forms of
corporations, and they are frequently referred to commonly as corporations.
C Corporations are subject to corporate income taxes
separate from the owners, where most other forms of business entity allow for
the company profits to "pass-through" to the personal income tax statements of
the owners.
As such, C Corporations are the most formal business entity
and they have greater tax reporting responsibilities than other business
entities. C Corporations allow for profits to be retained in the business, if
desired, and frequently these profits can be taxed at a lower rate than
personal income.
C Corporations can also pay out after tax profits to its
owners in the form of dividends, but this can also lead to double taxation.
Under state incorporation law, there is typically no
distinction between a C corporation and an S corporation. However, the two
types of corporate entities are subject to differing federal and state tax
treatment.
As a tax-paying entity, the C corporation must pay taxes on
its taxable income prior to making dividend distributions to stockholders. It
is allowed to issue more than one type of stock and can have any number of stockholders.
As a separate legal entity, the corporation's finances and
records are established and maintained completely separate and distinct from
the finances and records of the stockholders.
Through a resolution adopted at a
stockholders meeting held in accordance with the bylaws of the corporation, one
or more officers or employees of the corporation are authorized to conduct
business on behalf of the corporation.
The resolution typically includes an authorization within
specified limits to borrow and repay funds as needed for business operations.
Credit arrangements are made in the name of the corporation with loan document
signatures by the authorized person or persons after the lender has received a
certified copy of the authorizing resolution.
The Corporate Charter includes information on the purpose(s)
for which the corporation is organized and the life of the corporation. (A
corporation often has perpetual life.) Bylaws of the Corporation are the
"rules" for conducting the organizational life of the corporation.
Moderate legal costs are incurred in setting up a C
corporation, and annual costs are incurred for stockholders meetings, tax
return preparations, and preparing other yearly reports and summaries as needed
for management and desired by stockholders.
Public notice of the formation and
continued operation of a corporation is required and is accomplished through
filings with the state government.
Advantages of the C Corporation
Creation of the corporate shield that, in the absence of
personal guarantees, limits the liability of stockholders to their capital
investment in the corporation and the usefulness for estate planning purposes
of the corporate form of business organization are frequently cited advantages
of forming a C corporation. Other advantages include the following:
- The
purchase, sale, and gifting of stock make possible changes in ownership
without disturbing the corporation's ability to conduct business.
- The
required separation of finances and records for the corporation reduces
the risk of unrecognized equity liquidations.
- To the
extent the corporate shield is maintained and other investments and
savings of the stockholders are not at risk, the personal life of
stockholders is simplified.
- The
annual meetings of stockholders and consultations with legal counsel can
provide stimulus for improved communication with the stockholder group
(usually a family group) and can provide more comprehensive guidance for
management.
- The
perpetual life of the corporation makes possible its continuation, and the
relatively undisturbed continued operation of your business, despite the
incapacity or death of one or more stockholders.
- A big
tax deduction available to owners of a C corporation that is not available
to shareholders that own over 10% of an S corporation are insurance
deductions. Medical insurance and other medical costs can be 100%
deductible to C corporations.
This includes medical insurance payments,
deductibles, prescription items and non-prescription items such as aspirin
and bandages. Life insurance up to a set limit per person is also tax
deductible.
- Housing
costs and other benefits for employees (including stockholder-employees)
can be a tax-deductible expense for the corporation.
- Fractional
ownership interests are easily accommodated in the initial offering of
stock.
Limitations of the C Corporation
- Conflicts
or disagreements among the usually small group of stockholders in a small
scale entrepreneurship corporation may immobilize decision-making.
- Restrictions
on the sale of stock and/or buy-back agreements included in the bylaws may
prevent minority stockholders from being able to recover the value of
their investment in the corporation.
- Through
the processes of gifting and inheritance, stock ownership can become
divided among many persons who are not participants in operations of the
business, and that can result in their becoming a voting block that does
not support needs and decisions believed desirable by managing
stockholders.
- Over
time, corporation paid benefits for stockholder-employees may become
costly and exceed the ability of the business to pay.
- If
appreciated assets are owned by the corporation and the corporation is
dissolved, income taxes on the appreciation amount will be generated.
- The
corporate shield of limited liability may be lost: When corporate
formalities are not followed, that is, when director and shareholder
meetings are not held and minutes of such meetings are not kept.
When
corporate assets are treated as personal assets for example, when a
corporate vehicle is used for family vacation and the corporation is not
reimbursed for the non-business use.
Related Articles:
|
