What Is A C-Corp? Everything You Need To Know

What Is a Corporation?

Corporations differ from sole proprietorships, partnerships and LLCs in a number of ways. A corporation is a company or group acting as a single entity and has shareholders, directors and officers working in association. As a legal entity, a corporation is distinct from its shareholders, meaning shareholders aren’t personally responsible for debts of the corporation (shareholder liability is limited to what shareholders themselves have invested). Corporations are subject to a number of legal and/or tax requirements other types of businesses are not.

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What Is a C-Corp?

A C-corp is the most common type of corporation—essentially the default variety. Named for the subchapter of the Internal Revenue Code—subchapter “C”—under which its tax designation is described, tax reasons are what make a C-corp a C-corp. (S-corps and C-corps are no different under state corporation laws—only by way of the federal tax code.) With a C-corp designation, a corporate income tax is paid first by the corporation with a federal tax return (Form 1120) as required by the IRS. Shareholders must then pay taxes on personal income at the individual level for any gains realized from dividends.

C-corps have no major restrictions on who can own shares, meaning other businesses and entities both in and outside the United States can have ownership. There is also no limit to the total number of shareholders. C-corps, like all corporations, must follow operating rules called “corporate formalities” in order to maintain corporate protections.

While there’s no substitute for advice from licensed legal and tax professionals, an overview of the pros and cons can help point a business in the right direction:

C-Corp Advantages

• No restrictions on the amount of or identities of shareholders
• Limited liability for all shareholders, directors and officers
• Easier to raise equity financing than S-corps; investors tend to prefer C-corps
• Can issue more than one class of stock
• Lower maximum tax rate compared to the maximum personal tax rate applied to S-corps, sole proprietorships and partnerships

C-Corp Disadvantages

• So-called “double taxation” in which earnings are taxed first under a corporate income tax and then again in the form of personal income for shareholders’ dividends
• No personal write-offs, meaning shareholders can’t write off business losses on personal income statements, as some S-corp shareholders and members of other business structures are able to do
• More regulations and government oversight, including corporate formalities and more complex tax rules
• More expensive and time-consuming to start

Although common, C-corps aren’t necessarily the best choice for a business designation. As always, it depends on the specifics of the business. Here are some of the other more common options:

S-Corp

Like a C-corp, an S-corp is composed of shareholders, directors and officers and follows the corporate regulations in order to enjoy the same protections from personal liability. An S-corp is distinct in that it avoids the double taxation situation faced by a C-corp. S-corps are considered “pass-through tax entities,” meaning income can go directly to shareholders without first facing a corporate income tax.

In essence, an S-corp combines the tax privileges of a partnership with the corporate protections of a C-corp. In exchange for these benefits, however, S-corps are subject to a number of regulations, including a maximum limit of 100 shareholders and strict rules about what types of entities can become shareholders.

Sole Proprietorship

If liability protections afforded by a legal separation of business and a single business owner are not important or desirable to a business founder, a sole proprietorship might be an appropriate alternative, given other specific circumstances are appropriate. Sole proprietorship is the simplest structure for a one-owner business, giving the owner few regulatory burdens and a high degree of control and flexibility. Without a distinct business entity, however, there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner. Unlike a corporation, this means the owner is on the hook directly for any legal or financial failures of the business.

Partnership

Partnerships are similar to sole proprietorships when it comes to liability and taxes. A partner of a general partnership, like a sole proprietor, reports his or her share of income, expenses, credits, profits and losses on his or her personal tax returns, paying a personal income tax rate and assuming the business’s liability as his or her own. A limited partnership (LP) or limited liability partnership (LLP) may also be considered depending on the industry and other specifics.

LLC

A limited liability company balances the relative ease and flexibility of a partnership structure with the increased risk protection and tax advantages of a corporate structure. LLC owners (known as “members”) aren’t personally liable for business obligations. By default, members pay taxes in the same way as would owners of a sole proprietorship or general partnership. But an LLC can also elect to be taxed as a C-corporation or an S-corporation if it meets certain requirements. Many small business owners choose LLCs for the simplicity and flexibility this structure offers.

In order to establish an LLC, instead of filing Articles of Incorporation like a corporation, LLC founders must file Articles of Organization with whatever state agency manages business registration. Like a corporation, an LLC must list a registered agent.

There is no one best option among the possible business or tax structures. The choice should be based on the specific situation of each business, and business owners should consult with legal and tax professionals during the process. In many cases, the choice is not set in stone. Plenty of businesses that begin as partnerships and LLCs eventually transition to C-corp status. Regardless of what you plan for your business, it’s important to have a clear understanding of each option so you can weigh pros and cons carefully.