C Corporation

What is a C Corporation?

A C Corporation refers to any business entity that, according to the United States Income Tax Law, is taxed separately from its owners. The bulk of large companies (and a number of smaller companies) are treated as C Corporations because of their tax advantages.

A business entity can be formed in a variety of ways, ranging from a general partnership to a sole-proprietorship or an LLC to a corporation. A C Corporation (referred to as a corporation) is remarkably different from other business formations because it is regarded as independent legal entity that is distinct from individuals who own, manage and control the business. Because of it is recognized as a separate entity, a C Corporation is viewed as a legal “person” with regards to tax laws. This status enables the C Corporation to be engaged in contracts and business. Moreover, as a separate legal entity, a C Corporation can be taxed, as well as initiate a lawsuit or be sued itself.

A C Corporation is a business term that is used to separate itself from other business formations—the distinct classification is necessary because the C Corporation’s profits are taxed separately from its owners under subchapter C of the IRS.

C Corporations are owned by shareholders, who are responsible for electing a board of directors. The board of directors is a group of executives who makes business decisions and oversees policies for the entire C Corporation. In most formations, a C Corporation will be required to report it financial operations to its state’s attorney general. Because a C Corporation is treated as a distinct entity, the formation will still exist when its shareholders or owners change or die.

Another primary advantage of C Corporations is that its owners possess limited liability. Because of this characteristic, a C Corporation will not face personally liable for debts incurred by the entity—a C Corporation will not be sued individually for wrongdoings.

Primary Benefits of a C Corporation:

• Unlike a Limited Liability Corporation or a sole proprietor, a C Corporation is less likely to be audited by the United States government.

• Owners and shareholders of the C Corporation have limited liability with regards to the formation’s debts.

• C Corporations are allowed to deduct the cost of benefit as business expenses. For example, a C Corporation can write off the entire cost of a health plan that is established for its employees as a business expense. All benefits and costs associated with a C Corporation are tax-free.

• C Corporations can be formulated to split the corporate profit amongst the corporation itself and the owners of the entity. This split will result in overall tax savings. The tax rate for C Corporations is typically less than that for an individual, particularly for the first $50,000 of taxable income.

• Under a C Corporation formation, the entity can possess an unlimited number of stockholders. This enables the C Corporation to sell shares to a larger number of investors, which in turn, enables the C Corporation to secure more avenues to fund their projects. Additional monies can be raised by C Corporations by selling stocks if the entity is in need of expansion.

• Foreign governments have the right own or invest in C Corporations. There is no binding regarding the type of investors as there are in the case of an S Corporation.

• The majority owner of a C Corporation may issue different “classes” of stocks; C Corporations issue primary and secondary issues of stock.

Tax Benefits of a C Corporation:

C Corporations are awarded a number of C Corporations; the exposure to these tax benefits will depend on the entity’s business income.

C Corporations are the only business formation that is not a pass-through activity; a C Corporation’s net income is not taxed at the corporate rate before it is distributed to the shareholders or owners, who must then also pay tax on the income.

A small-business owner who creates a C-Corporation will have to file one of two forms with the Internal Revenue Service. The first form is for personal taxes, including all income generated from the business and another for their role in the business. The business income will be filed on Form 1120 (United States Corporation Income Tax Return) or Form 1120-a (United States Corporation Short-Form Income Tax Return).

If the entity reports an income under $50,000 the C Corporation will be taxed at 15 percent. At the same time, the individual owner or shareholder claims that income through an S Corporation an LLC or a sole proprietorship would require the individual to fulfill higher tax rates on their 1040 tax forms—the rate would be $4,386 plus 25 percent of the amount beyond $31,850.

If the business is profitable, the C Corporation will be entitled to a number of deductions that may make it possible for the company to have $50,000 or less in business income following deductions. For example, the owner’s salary (and the salaries of their employees) of a C Corporation is tax-deductible for the business. A C Corporation will also enjoy other tax breaks, including:

• Compensation of directors and officers

• Tax deductions associated with rent, repairs, maintenance, depreciation and charity donations

• The C-Corporation is permitted to engage in profit-sharing and employee benefit plans, including pensions and insurance.

A C Corporation, because of the presence of shareholders, can issue stock or options to its employees.

C Corporations and Their Tax Rates:

For a general purpose, a system of graduated marginal tax rates is applied to the C Corporation’s taxable income, including all capital gains. The marginal tax rates on a corporation’s income are as follows:

• For corporations with a taxable income between 0 to 50,000 the tax rate is 15%

• For corporations with a taxable income between 50,000 to 75,000 the tax rate is $7,500+25% of the amount over 50,000

• For corporations with a taxable income between 75,000 to 100,000 the tax rate is $13,750 + 34% of the amount over 75,000

• For corporations with a taxable income between 100,000 to 335,000 the tax rate is $22,250 +39% of the amount 100,000

• For corporations with a taxable income between 335,000 to 10,000,000 the tax rate is $113,900 + 34% of the amount over 335,000

• For corporations with a taxable income between 10,000,000 to 15,000,000 the tax rate is $3,400,000 + 35% of the amount over 10,000,000

• For corporations with a taxable income between 15,000,000 to 18,333,333 the tax rate is $5,150,000 + 38% of the amount over 15,000,000

• For corporations with a taxable income over 18,333,333 the tax rate is 35%

Disadvantages Associated with a C Corporation:

C Corporations are extremely complicated with regards to tax laws. For instance, if the owner or board of directors of a C Corporations wants to issue dividends to shareholders, the entity will not only pay taxes on the profits Moreover, when compared to a sole proprietorship or a limited liability company, a C Corporation is typically more difficult to establish.

How is a C Corporation Formed?

A C Corporation, in the United States, is formed according to the laws of individual states or Washington, D.C. The procedures and requirements that govern the formation of a C Corporation will vary widely by state. For instance, some states will allow for the formation of corporations through electronic filings on their government’s web site or through a lengthier paper process. That being said, all individual states will require a fee for incorporations.

C Corporations are formally issued “certificates of incorporations” by the majority of states upon formation. The bulk of state corporate laws will require that the basic governing mechanism be either the formal articles of incorporation or the certificate of incorporation. Several C Corporations will also adopt additional governing regulations, referred to as bylaws. The majority of state laws in the U.S. will require at least on official or director (and at least two officers) to be a part of the C Corporation’s board of directors or governing body. Typically, there are no residency requirements for the officers or directors of a C Corporation.

C Corporations are not required to issue financial statements in the United States. These financial statements may be presented on any basis with regards to the comprehensiveness of the document.

The bulk of state laws will permit distribution of any financial or property amount to the corporation’s shareholders so long as the transfer does not render the corporation insolvent. Any transfer of earnings and profits of the C Corporation is viewed as a dividend for U.S. tax purposes. This system essentially treats profits and earnings similar to retained earnings.

C Corporations vs. S Corporations:

A C Corporation is distinguished from an S Corporation (which is also taxed separately) because it is not taxed separately. When a business is incorporated, shareholders may elect to treat the corporation as a flow-through organization (S Corporation). These types of corporations are not subject to income tax; however, the individual shareholders of the S Corporation are subject to tax on the income generated from their shares. Dissimilar to S Corporation, a C corporation does not have any restrictions regarding the number of shareholders.

Although S corporations are entities for the purpose of local law, not all states will recognize an S corporation for income tax purposes. For instance, an S corporation is recognized in the state of Massachusetts but not New Hampshire. By default, an incorporated entity will be viewed as a C corporation; if the owner or shareholders wish to be taxed as an “S” corporate, they must file form 2553 to inform the Internal Revenue Service that the owners elect this tax treatment.

The primary distinction between a C Corporation and an S Corporation is that the S Corporation passes its taxable income or losses directly to their shareholders, while C Corporations pay taxes on the corporation’s income directly. To elaborate, view the following example:

If an S and C Corporation make $100,000 annually through sales and have general expenses of $50,000, less $35,000 in general salaries, both the S and C Corporation will possess a taxable income of $15,000. Now, in this example, the S Corporation’s $15,000 will be passed through to its shareholders—these individuals will be taxed directly under their 1040 Federal tax forms. For example, if the corporation is owned 25% by 4 shareholders, each individual will reports $3,750 as income on schedule E. This income is passed through to the shareholders when the corporation files an 1120S income tax return. This tax form will include a K-1 form that will inform the owners of their pro rata share of taxable income. The shareholder will then receive this income or a distribution in cash.

In regards to ownership, a C Corporation has no restrictions, while an S Corporation does. S corporations are restricted to no more than 100 shareholders—these individuals must be US residents or citizens. Moreover, an S Corporation cannot be owned by a C Corporation, a Limited Liability Corporation, and the majority of trusts, partnerships or other S Corporations. Also, an S corporation may have only one class of stocks, whereas C corporations can offer multiple forms of shares. C corporations therefore offer more flexibility when establishing businesses if you wish to grow, expand or sell the corporation.