Buy, sell, and own property in its own name Enter into contracts and incur its own debts that the owners aren’t responsible for Be liable for wrongdoing, so it can be sued and can also sue when it’s been wronged
A C corporation often has more than one owner, referred to as a shareholder, but it can have just one, as well. These are individuals or other companies who effectively buy into ownership of the corporation by buying shares of the business. Despite that, they are still separate entities from the business, so these individuals generally cannot be sued or be at risk for actions taken by the company.
Alternate Name: C corp
Let’s say that Diego and Chloe want to go into business together. They form a C corporation. Various friends and family members support their idea to the extent that they buy shares in the business, raising capital to fund its operation. All told, including Bob and Sue, there are 10 shareholders. Over time, the business incurs $1 million in debt and goes under. Diego, Chloe, and the other shareholders aren’t personally responsible for repaying that money. Sue can have a change of heart and sell her share of ownership to someone else, if possible. Or she might die, in which case her shares are passed to her heirs.
How a C Corporation Works
Ownership of a C corporation is determined by how many shares each shareholder holds. Each shareholder is a partial owner of the business. If Ahmed purchased 40 out of 100 shares of Diego and Sue’s corporation, Ahmed would own 40% of the corporation. But Ahmed probably won’t run the operation. He’s just an investor. The investors/shareholders will collectively elect a board of directors to manage the business. The board of directors can sell additional shares of the business. It might do this if it needs to raise capital for a new venture or expansion, for example. The shareholders receive income in exchange for their buy-in. They’ll receive dividends as a percentage of the corporation’s profits—what’s left after operating and business expenses are deducted from its gross earnings—based on how many shares they hold. When it comes to the tax process, personal tax liabilities are not connected to the losses of the company at hand. Income earned through business practices is taxed. Once this occurs, the owners make money.
Pros and Cons of C Corporations
Pros Explained
C Corporations are separate legal entities: The primary benefit of a C corporation is the insulation it provides to shareholders, shielding them from any liability for the corporation’s actions or debts and vice versa. They can raise capital when necessary by selling more shares: If a corporation is in a tight spot, it is relatively easy for them to sell more shares and raise capital. They often have an easier time borrowing money than other corporations because of this, as lending institutions know C corporations can raise additional income in a pinch and pay off their debts.
Cons Explained
C corps are often subject to double taxation: First, the corporation pays taxes on its profits, and then it distributes dividends to shareholders from those profits. The shareholders must also report these shares of income on their personal tax returns. The corporation doesn’t get a tax deduction for dividends paid to shareholders, and shareholders can’t deduct any of the corporation’s operating expenses or other costs of doing business. The corporate tax rate is expected to increase under President Joe Biden: The U.S. corporate tax rate has been 21% since the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017—but it might increase in the near future. President Joe Biden has indicated a desire to increase the rate to 28% during his term.
Other Types of Corporations
Although the term “corporation” usually refers to C corporations, there are other forms of this business structure, as well.
S Corporations
An S corporation is one that has made an election with the IRS to be taxed differently than a C corporation. The S corporation itself isn’t taxed. Profits—and losses, as well—trickle down and pass through to shareholders, who must then report them on their own personal tax returns. This allows corporations to avoid being taxed twice. An S corporation must:
Have no foreign ownersBe a U.S. corporationHave no more than 100 approved shareholdersIssue only one class of stock
Nonprofit Corporations
Sometimes referred to as 501(c)(3) corporations per the Internal Revenue Code that provides for them, nonprofits aren’t in the business of passing profits on to their shareholders. Rather, they use the money to further one or more social causes. They’re typically formed by religious, charitable, and educational organizations rather than individuals. Nonprofit corporations are tax-exempt at both the federal and state levels. Their profits aren’t taxed and members aren’t permitted to receive any compensation. These corporations must register with the IRS to receive this exclusion.
B Corporations
Sometimes called a benefit corporation, B corporations are something of a hybrid between C corps and nonprofit enterprises. They support various public benefits, but they additionally pay out to their shareholders. States can require these corporations to submit annual reports to prove that they are indeed furthering their chosen cause, and to what extent.
Requirements for a Corporation
Forming any type of corporation is not something you’d want to go through without professional guidance. The correct documentation and legal structuring are critical to reaching your goals. To form a C corporation, you must file articles of incorporation with your state according to its particular regulations, which can vary slightly from jurisdiction to jurisdiction. Bylaws and a charter must be drafted as well, and stock must be issued, even if a C corp has just one shareholder. Leaving a C corporation is also complicated. If you determine the company is not meeting your needs, you need to go through a process to separate yourself from the corporation. You’ll need a liquidator—someone who’s assigned to sell assets and satisfy the business’ outstanding debts from the proceeds. Shareholders would only receive shares of any funds that are left over.
