A business can be set up in a variety of ways, ranging from a sole-proprietorship to a general partnership, an LLC to a corporation. Corporations are remarkably different from other forms of businesses in the sense that it is an independent legal entity that is separate from the people who own, control and manage it.
Due to this recognition as an individual entity, it is viewed as a legal “person” in the view of tax laws, and can thus be engaged in business and contracts, can initiate lawsuits, and itself be sued. It also must pay taxes.
A C corporation is a business term that is used to distinguish this type of entity from others, as its profits are taxed separately from its owners under subchapter C of the Internal Revenue Code. Contrast this with an S corporation where the profits are passed on to the shareholders, and are taxed based on personal returns. This is done under subchapter S of the Internal Revenue Code.
A C corporation is owned by shareholders, who must elect a board of directors that make business decisions and oversee policies. In most cases, a C corporation is required to report its financial operations to the state attorney general. Because a corporation is treated as an independent entity, a C corporation does not cease to exist when its owners or shareholders change or die.
Another major advantage of a C corporation is that its owners have limited liability. Thus, they do not stand personally liable for debts incurred by the corporation. They cannot be sued individually for corporate wrongdoings.
Major Benefits of a C Corporation
- As opposed to a sole proprietor or an LLC, corporations are usually at a lower risk of being audited by the government.
- The owners and the shareholders of a C corporation have a limited liability towards business debts.
- A C corporation can deduct the cost of benefit as a business expense. For example, they can write off the entire costs of health plans established for employees as business expenses. These benefits are tax-free even for those receiving them.
- A C corporation can be used to split the corporate profit amongst the owners and the corporation. This can result in overall tax savings. The tax rate for a corporation is usually less than that for an individual, especially for the first $50,000 of taxable income.
- In a C corporation, there can be an unlimited number of stockholders. This allows the corporation to sell shares to a large amount of investors, which allows for more funds to be raised for projects.
- Additional funds can be raised by a C corporation by the way of the sale of stocks if the company stands in need of finances for expansion
- Foreign nationals have a right to own or invest in a C corporation. There is no binding on the type of investors as in the case of an S corporation. This lets a greater number of diverse investors participate in the business and also allows foreign money to flow in for investment.
- The owner (majority shareholder) of a C corporation has the option of issuing different “classes” of stocks to different shareholders. This helps attract different groups of investors as common stocks and preferred stocks both have their own distinct advantages that may appeal to one but not to another.
There are various routine formalities that a C corporation needs to follow. These routines are an integral part of the working of a C corporation, and failure to follow these formalities can lead to serious consequences, including denial to recognize the company as a corporation. The formalities that need to be followed in a C corporation are:
- Adequate investment of money (capitalization) in the corporation.
- Formal issue of stocks to the initial shareholders.
- Regular meetings of directors, and the shareholders.
- Upkeep and update of business records and transactions of a corporation separate from those of its owners.
Limits on the Limited Liability
While a C corporation is an attractive way of forming a business due to its provision of limited liability to its owners, there are certain circumstances wherein the limited liability will not be able to protect the owner’s personal assets. An owner will be held personally liable if:
- He or she directly injures someone personally.
- He or she has personally guaranteed a loan or a business debt for the corporation, which the corporation fails to repay.
- The person fails to deposit taxes that have been deducted from the employee wages by the corporation.
- Such a person is part of intentional fraud or other illegal action that results in loss to the corporation, or someone else.
- Such a person treats the corporation as an extension of his/her personal property, rather than a separate entity.
- The courts rule that a corporation ceases to exist, as the corporate formalities have not been adhered to.