How Does a C Corporation Work
Most business people in the United States opt to structure a business as a C Corporations. In this posting, we shall discuss a C Corporation. We explain clearly what it is all about, then discuss tax brackets applicable in a C Corporation. Its comparison with an S corporation, and the difference and why most U.S. business people love to structure a business entity as a C Corporation. I guess these ideas are something anyone at any level should know to make a good decision about how to structure one’s business.
What is a C Corporation?
A C Corporation, in short, is a legal business structure for a corporation with separate taxation of the owners or shareholders. Unlike an S Corporation, whose profit can be passed straight to the owners, a C Corporation is subject to income tax. This corporate legal form has some benefits associated with it, such as limiting liability for the owners; however, it also holds other responsibilities, especially towards taxes.
C Corporation Definition
A C Corporation is a corporation taxed separately from its owners under the provisions of Subchapter C of the Internal Revenue Code. It allows for an unlimited number of shareholders, which is one of the reasons this type of corporation is highly sought after by businesses trying to find a means to raise capital through public offerings or venture capital investments.
In addition, C Corporations are more regulated and have specific reporting demands than any other type of business structure, be it a sole proprietorship or an LLC. In most cases, they require conducting meetings, keeping highly detailed records, and reporting annually to the state.
C Corporation Tax Brackets
Business owners should be aware of the tax implications of the C Corporation. C Corporations will have a corporate tax that depends on income level. The current tax brackets under the C Corporation are explained as follows.
0% for income up to $50,000
15% for income more than $50,000 but not exceeding $75,000.
25% for income exceeding $75,000 but not exceeding $100,000.
34% for income more than $100,000 but not over $335,000.
39% on income over $335,000 but not over $10,000,000.
34% on income over $10,000,000 but not over $15,000,000.
35% on income over $15,000,000.
Of importance to note is that the taxes for C Corporations double. That is, they are taxed on their earnings and then further taxed on dividends received. This leads to a total tax burden being higher as compared to pass-through types of corporations, such as the S Corporation.
C Corporation vs. S Corporation
A decision any business owner has to make is which is a better option between the C Corporation and the S Corporation. Both provide limited liability but differ extensively in the area of taxation and operational requirements.
Differences
Taxation:
In a C corporation, taxation is a double whammy, as is discussed above. The profits are taxed at the corporate level and taxes are then again levied on dividends received by shareholders.
S Corporations pass-through profits and losses directly to the shareholders; no double taxation.
Ownership:
Shareholders in a C Corporation are unlimited, and they can come from any country.
Shareholders of an S Corporation must be limited to 100, and they have to be citizens or residents of the U.S.
Classes of Stock:
A C Corporation may issue different classes of stock: common and preferred stock.
S Corporations can only have one class of stock, although voting rights can be different.
Corporate Formalities:
C Corporations are formal in structure and must adhere to corporate formalities like regular meetings, minutes, and elaborate record-keeping.
S Corporations are also formal in requirements but could be less stringent than those imposed on C Corporations.
Eligibility and Formation:
Any group of persons can form a C Corporation, and there is no particular eligibility requirement.
S Corporations have qualification requirements, such as being a domestic corporation with eligible shareholders and electing S Corporation status with the IRS. Which is Right for Your Business?
The choice between a C Corporation and an S Corporation is based on several criteria, including your goals in business, the number of shareholders, and your preference regarding taxes. If you need to raise capital significantly or expand abroad, a C Corporation is a better choice. But if you are looking to avoid double taxation and have only a few shareholders, an S Corporation would be your best bet.
Conclusion
Knowing the details of a C Corporation can guide business owners in decision-making about their corporate structure. Here, there is protection from liability, allowing for raising capital, and several tax effects that make C Corporations worthwhile for many businesses, but double taxation and operations go with it.
Whether you opt for a C Corporation or an S Corporation, seek professional advice from legal and financial experts so that you will not breach any rules as you strive to get the best for your needs.
Frequently Asked Questions
What are the best benefits of having a C Corporation?
A C Corporation has some limited liability, equity financing through sales of stocks, and tax advantage among others
Can a C Corporation be transformed into an S Corporation?
Yes, a C Corporation can elect to become an S Corporation if it meets the eligibility requirements and follows the necessary procedures.
How often must a C Corporation hold meetings?
A C Corporation is required to hold annual meetings of shareholders and directors and maintain minutes of these meetings.
What are the filing requirements for C Corporations?
C Corporations are required to file annual reports with the state and also file Form 1120 with the IRS for reporting corporate income.
Is there any limitation on compensation paid to C Corporation shareholders?
There are no specific limitations, but compensation should be reasonable and justifiable to avoid any tax implications.
