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Everything You Need to Know About C Corp
What Is a C Corporation?
A C Corp is one of the ways to structure a business for tax, regulatory, and other legal purposes (other popular business structures include LLCs, S Corporations, Sole Proprietorships and nonprofits).
A C Corp structure is usually a better choice for businesses that plan to publicly trade shares through an Initial Public Offering (IPO) and may grow to have more than 75 shareholders.
Examples of Well-Known C Corps
Many products and services you use daily are probably created by C Corps because most of the larger businesses in the US are structured this way.
Today, there are about 1.4 million small businesses organized as C-Corporations in the US, and more than half of all corporations (and 64% of Fortune 500 companies) choose to incorporate in Delaware. Why? Most corporations choose Delaware because of the state’s flexible, modern corporation laws and because of its Court of Chancery that rules on corporate disputes without the need for a jury, meaning corporate cases won't get stuck in legal limbo behind a bunch of non-corporate issues.
Examples of C Corps you’ve probably heard of include:
The Advantages and Disadvantages of Starting a C Corporation
There are four main advantages to becoming a C Corp:
- Asset Protection
Because a C Corp is a separate legal entity, the business’s liabilities and debts are separated from the liabilities of the directors, investors and shareholders. This means that the owners aren't personally liable for the business's obligations, and their personal assets won't be at risk. This doesn’t apply in all cases, like if corporate funds are misused, there is willful fraud or certain rules and regulations aren’t followed.
- Flexible Ownership
A C Corp is owned by whoever holds the stocks it issues. Investors can buy and sell stocks, and if the company’s shares are publicly traded, institutions and members of the public can purchase stock in the company.
- No Limits on Ownership
Unlike LLCs and S Corps, there’s no limit to how many owners a C Corp can have.
- More Capital
C Corps are typically much more attractive to potential investors, like venture capitalists and shareholders, because this type of business structure allows for wider ownership of the corporation.
There are also four disadvantages of becoming a C Corp:
- Double Taxation
At tax time, a C Corporation will file a corporate tax return and pay taxes on its profits. Then, the post-tax income may be distributed to shareholders in the form of dividends. The shareholders are then taxed on dividends, which effectively forces the owners of a corporation to pay taxes on the same earnings twice. This is called “double taxation.”
- A Lot of Rules
There are a lot more formalities, regulations and legal rules C Corps have to follow than there are for S Corps and LLCs. C Corps must hold and document director and shareholder meetings; prepare and record minutes for these meetings; draft, agree and document major corporate resolutions and decisions; create, adopt and update bylaws as needed; issue stock to shareholders and record stock issues and transfers; maintain an accurate stock register; maintain corporate records; and record and file the names, addresses and other information about corporate officers or directors.
- Losses Aren’t Deductible
Other business structures, like LLCs and S Corps, let owners deduct the business’s losses on their personal tax returns. With C Corps, this isn’t allowed. You can only deduct these losses on the corporation’s tax return.
- Higher Costs
From starting up to sustaining the business, C Corps can cost a lot more to maintain than LLCs, S Corps or sole proprietorships.
Differences Between a C Corp, S Corp & LLC
Two other popular business entity structures in the US are the S Corp and the
LLC. They provide many of the same protections as a C Corp, but have less formal rules on taxation, governance, and compliance. If you’re registering as any of these entities, you’ll most likely have similar requirements to get started. For example, every business will need to file Articles of Incorporation and get a registered agent. Most of the differences between entities are more noticeable once you get up and running.
One of the most significant differences between forming C Corps and S Corps/LLCs is how income is taxed.
For LLCs and S Corps, earned income passes through to the owners’, shareholders’ and members’ tax returns, where it is then taxed as part of their overall income. The company doesn’t need to file a separate tax return. A C Corp, however, is taxed at the corporate level. This means it has to file a separate tax return as a business entity and pay a corporation tax on any profits earned.
Business Comparison Chart
How Are C Corps Taxed?
Like we mentioned above, C Corps are taxed as a completely separate entity. Unlike individuals, C Corps have to file a designated tax form with the IRS, and C Corporations have their own tax rates.
C Corporation Taxation Guide
Before 2018, C Corp tax rates depended on how much profit the business made. But the Tax Cuts and Jobs Act (TCJA) of 2018 made it so C Corps pay a flat rate of 21% no matter how much profit they make.
Under this new law, the max individual tax rate is now 37% and allows for a 20% deduction for pass-through income, equaling a max 29.6% tax rate for pass-through income for LLCs and S Corps. This max is higher than the 21% for C Corps, but C Corps still have to deal with double taxation, meaning the C-corporation pays taxes on its profits then shareholders pay taxes on dividends (and dividends may be taxed 3.8% if the taxpayer’s adjusted gross income is more than $200K).
So, while the C Corp rate of 21% may look lower, the double taxation and dividends tax can put it closer to the 29.6% pass-through rate. If lower taxes are the only reason you’re considering starting or converting to a C Corp, talk to a tax professional in your state to figure out the advantages and disadvantages of each business entity for your personal situation.
How Much Does It Cost To File a C Corp?
Each state has different rules, regulations, and fees when it comes to forming a C Corp. For example, if you’re starting a C Corp in Arkansas, you’ll pay a $50 filing fee, but if you’re starting a C Corp in Nevada, the filing fee is much higher at $725.
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Is Starting a C Corp Right for Small Businesses?
When deciding whether or not to start or convert a company to a C Corporation, entrepreneurs should first consider their business goals. Will you publicly trade shares through having an IPO? C Corps are much more attractive to potential investors because it allows wider ownership of the corporation. You should also consider whether the level of paperwork and taxation structure is the right fit for the business.
While the C Corp is a well-known business structure, there are other options for entrepreneurs who are forming small businesses in the U.S. In fact, according to the Small Business and Entrepreneurship Council, the number of C corporations has been declining since the mid-1980s, while S Corps, LLCs, partnerships and sole proprietorships have become more popular. This is most likely due to the high corporation tax rates that C Corporations had to pay before the 2017 Tax Cuts and Jobs Act. Before this act, C Corps could pay tax rates as high as 35%, but today they all pay a flat rate of 21%.
A C Corp May Be Right For You If You:
Common Questions About How to Form a C Corporation
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