Everything *Most* People Need to Know About C Corporations
Photo by Michael Hart on Unsplash
Author: Ty Leitow
Last Updated: December 24, 2023.
What is a C Corporation?
A C corporation is a certain type of business structure designated by the IRS. Businesses can have different legal structures, and each type provides different benefits and drawbacks to the owners, management and employees. Other common business structures include limited liability companies (a “LLC”), S corporations, partnerships, and sole proprietorships.
Under the Internal Revenue Code, Subchapter C, which is where C corporation’s get their name, a C corporation is subject to double taxation. Double taxation means the company pays corporate taxes on profits before distributing those profits to their shareholders in the form of dividends. Shareholders who receive dividends are subject to personal income taxes on the dividends they receive. Taxation at both the company level and the shareholder-dividend level is known as double taxation, and it’s one of the key distinguishing traits of a C corporation.
Many large, well-known companies are C corporations, like McDonalds, Starbucks, and Apple.[1] This may lead you to think that most businesses are C Corporations, but that is not the case. In the US, C Corporation’s do earn a disproportionate share of revenue when compared to other business structures, but C Corporations only account for roughly 5.6% of all businesses in the United States.[2] The most common type of business structure is the sole proprietorship (73.1%), followed by S Corporations (13.1%) and Partnerships (8%).[3]
What are the Benefits of being a C Corporation?
Ease of Raising Capital. C corporations can easily raise capital by selling stock. Theoretically, a C corporation could raise nearly an unlimited amount of cash simply by selling its stock. Compared to other business structures, a C corporation’s sale of stock is one of the easiest methods of funding a business. There’s no limit to the number of shareholders a C corporation may have, but once you hit certain thresholds, you do have to register with the SEC, which will be discussed in more detail below.
Limitation of Liability. C corporations limit the personal liability of its directors, officers, employees and shareholders. Generally, business liabilities of the corporation cannot become a personal obligation of any individual director, officer, employee, or shareholder. Said differently, generally, shareholders, directors, officers and employees will not be held personally responsible for the debts and liabilities of the business.
This limited liability is sometimes referred to as the “corporate veil”. In certain circumstances, for example when shareholders, directors, officers or employees mix personal funds and debts with the company’s, the corporate veil can be “pierced”, and individuals may be held responsible for business debts and liabilities.
No Ownership Restrictions. Other business structures have certain restrictions on who may be an owner of a company. C corporations, however, have no such restrictions, meaning in addition to individual persons, other business entities and non-US citizens may also own shares of a C corporation.
Perpetual Life. C corporations are separate legal entities from their shareholders, and this allows a C corporation to continue perpetually, beyond the life of the owners. Owners (shareholders) can come and go, shares may be bought and sold, and all other things being equal, such shareholder activities will not affect the business as a going concern. A C corporation can theoretically exist forever.
Passive Income. C corporations separate management functions from the owners, allowing owners to earn passive income based on company performance and dividends.
What are the Drawbacks of being a C Corporation?
Double-Taxation. The main drawback to C corporations is double taxation. Corporate profits are taxed once, and those profits are taxed again when they are distributed to the shareholders.
No Pass-Thru of Business Losses. In other business structure types, the losses of the business may be claimed on the owner’s personal tax returns. This allows the owners to reduce their individual tax liability if the business fails to produce a profit. C corporations do not have this benefit, and business losses of a C corporation may only be claimed by the business on its corporate tax filings.
Costly to Start. Compared to other business structures, like a limited liability company or partnership, a C corporation is more expensive to start. Filing the Articles of Incorporation for a C corporation can be costly and somewhat complicated, often requiring the assistance of a lawyer or accountant (or both).
Corporate Formalities. A C corporation is required to hold shareholder meetings, board meetings, and to maintain detailed and accurate minutes of each meeting. Additionally, a C corporation must keep voting records of the company’s directors, and records of the owners’ names and ownership percentages. Collectively, these activities are known as “corporate formalities”. Generally, corporate formalities must be performed, or the owners, directors and officers risk losing the limited liability protection discussed above.
Corporate Reporting. C corporations are required to file annual reports, financial disclosures, and financial statements. Additionally, when a C corporation reaches $10 million in assets and 500 shareholders, it must register with the SEC.
How Do You Create a C Corporation?
Speak to a Professional. Generally speaking, if you’re seriously interested in starting a C corporation, you should speak with an attorney, accountant, or other business professional with C corporation experience.
Choose a legal name for your company. Choosing a name of a company can be fun, or daunting, depending on the type of person you are. Company names can simply be the family name of the person starting the business (e.g. Ford Motor Company), something descriptive (e.g. T-Mobile), or unique (e.g. Apple, Google). Once you’ve decided on a company name, before you order any business cards, you’ll want to check two things: (1) that it’s available, and not previously registered by someone else, and (2) the name won’t be confused with some other business.
Business name availability generally depends on the state you incorporate in, and most secretary of state websites provide a business name lookup tool (as an example, this link is to Michigan’s business entity search website). These tools allow you to search databases to see whether a business name is available. Once you’ve confirmed that your chosen business name is available, you’ll want to do some research to make sure it won’t be confused with another company with a similar name. This is not a legal requirement per say, and some bad faith actors have chosen business names with the intent of confusing consumers. Generally speaking, you don’t want your business name to be confused with another company, especially if you plan to operate in a similar market, similar geographic area, or sell similar products or services.
Articles of Incorporation and Registered Agent. After you’ve determined a good and available business name, you’ll need to draft and file the articles of incorporation. In most cases, you’ll want the help of an attorney to ensure your articles are drafted and filed properly. In addition, you’ll need to identify a registered agent for the company.
Having a registered agent is a legal requirement, and the name and address of your registered agent will need to be included in the articles of incorporation. Registered agents are where legal notices and service of process are delivered. Usually, registered agents are law firms or third-party service providers who specialize in being registered agents.
Obtain a Tax Employer Identification Number. A Tax Employer Identification Number, or Tax EIN as its commonly referred to, is like your company’s social security number. It is a key identifying number for your business and is used by the IRS for tax purposes. Additionally, Tax EIN’s are generally required before you may hire W2 employees. Obtaining a Tax EIN may be done online, and is a relatively straightforward process. However, to ensure the proper information is provided to the IRS when filing for a Tax EIN, most people will want the support of an attorney or accountant.
By Laws, Shares and Formalities. Once you’ve filed your articles of incorporation, you’ll need to draft and adopt company bylaws. Bylaws generally describe how the company will be managed, and usually require the assistance of an attorney to draft. Additionally, you will need to issue shares of stock to the owners, hold initial meetings and vote for a board of directors. After your directors are selected, they will nominate and elect officers for the company. Once the officers are selected and a corporate bank account is opened, practically speaking, your C corporation is fully formed and operational.
[1] https://www.nerdwallet.com/article/small-business/c-corporation
[2] https://taxfoundation.org/research/all/federal/overview-pass-through-businesses-united-states/#:~:text=Sole%20proprietorships%20comprise%20the%20majority,partnerships%20(2.2%20million%20firms).
[3] https://taxfoundation.org/research/all/federal/overview-pass-through-businesses-united-states/#:~:text=Sole%20proprietorships%20comprise%20the%20majority,partnerships%20(2.2%20million%20firms).