Table of Contents
- 1 C Corporation – Definition
- 2 Formation of C Corporation
- 3 Advantages of C Corporation
- 4 Disadvantages of C Corporation
C Corporation – Definition
C Corporation is the most widely recognized, distinct legal entity under United States Federal Income Tax Law (USA), wherein a corporation is taxed separately from its owners or shareholders. It is governed by the laws of that state in which it has filed its Articles of Incorporation. It offers unlimited growth potential which means one can attract many wealthy investors. The shareholders get a protection from their personal liability arising out of the business. Corporations pay taxes on corporate earnings before distributing it to the shareholders. Then the shareholders have to pay taxes on the dividends received by them. The owners are taxed twice here.
Formation of C Corporation
The following are the one by one steps to be followed for the formation of the C Corp.
Choose a legal business name and reserve it by contacting the Secretary of that state in which you want to commence the business. Register the business name with that Secretary of the state, if he offers such a service. Most secretaries charge a fee and give a time period of generally 30 days to reserve that business name and in that meanwhile, you need to prepare the Articles of Incorporation. If within such a time period, the Articles are not filed, the name is released back to the public so that any other corporate can register that name.
Draft and file the Articles of Incorporation with your secretary of the state. One can also draft it on his own but preferable is to do through an attorney or an online service. In most of the states, there is also a requirement of listing out of the names and addresses of the initial directors and officers in the Articles of Incorporation.
Here, there is an issuance of the stock certificates to the initial shareholders once the notice of the acceptance and filing of the Articles of Incorporation is received.
Apply for the permits and business license required by the business entity. In some states, there is also a requirement of the Federal License before the commencement of the business operations. So, make sure that you acquire them else you may have to face heavy penalties.
File Form SS-4 to obtain EIN (Employer Identification Number) or else apply online. The online application generates the EIN very faster. The EIN number is the Tax ID Number of your corporation. Also, there will be a requirement of opening a bank account to file annual taxes. Even though the employer doesn’t hire any employee, he has to obtain this EIN number.
Apply for other ID numbers if there is a requirement of it by the state. Jurisdiction differs from state to state. So, the compliances and the legal formalities are also different in different states. Therefore, their fulfillment is also mandatory. Else, heavy penalties may occur. If one wants to start a corporation and is not familiar with the state rules and regulations, he must seek a legal advice.
Advantages of C Corporation
There is a limited liability of the shareholders, officers, employees, etc. Hence, any individual is not personally liable for the legal obligations of the business.
No matter how many shareholders may come and go, the corporation may keep operating. Other shareholders need not to worry about the dissolution of the corporation if one of the shareholders decides to leave or passes away.
If the corporation is having a rich goodwill in the market, they gain respect and trust automatically. The creditors will be eager to supply the raw materials, the banks will unhesitantly grant the loans, the public will start recognizing the corporation, etc
Unless otherwise stated by the corporation’s governing documents, there is no restriction as to the ownership of the stocks.
There is no limit as the number of arrival of the shareholders in the corporation. But, once the value of the assets cross $10 million and the shareholders are 500, the corporation needs to register with the SEC Act (Securities Exchange Act), 1934.
Some expenses are deductible at the time of the payment of taxes as per IRS (Internal Revenue Service). The tax advantages are especially in the field of employee fringe benefits. Medical reimbursement expenses, a premium paid in respect to the medical benefits, etc are non-taxable business expenditures unless otherwise stated.
Disadvantages of C Corporation
Personal Liability in case of fraud
If the owners misuse any of the corporation’s funds or have swindled money from others, they are personally liable to pay the obligations and debts. In this case, they cannot escape from their personal debts or liabilities caused due to them.
The biggest downside of C Corporation is double taxation. This problem arises when the corporation wants to distribute their profits to the shareholders at the end of the year. The corporation has to pay the tax on their income tax returns. Since the shareholders carry a separate entity from the corporation, they will also pay their own taxes. So, once the profits are distributed to the shareholders in the form of the dividend, the shareholders have to show that dividends as income received by them. They are to pay tax again at their personal rates on their income which is inclusive of the dividend.
Costly to incorporate and Maintain
There is a lump sum payment (fee) while it comes to the filing of the Articles of Incorporation. It is supposed to be paid in the state in which the corporation is operated. Also, the complex formalities, double taxation, sheer legal obligations make this corporation quite expensive for the shareholders.
Legal Formalities and Regulations
C Corporation faces more government supervision due to its complex tax rules, compliances, legal formalities and higher protection to the owners. Many states require a lot of legal proceedings and formal meetings as to how the corporation is going to manage their internal affairs? What are the strategies? What will their next plan be? etc
No deduction of corporate losses
There is no deduction available for corporate losses. The shareholders cannot write off that losses on their personal return.1,2