What is a C Corporation?
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UPDATED: Jul 16, 2021
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A C corporation is a business that has a distinctly separate identity from its owners. Because it is not an S corporation, sometimes a C corporation is referred to as an ordinary corporation. The owners are shareholders rather than partners or proprietors. While a corporation takes more time and effort to organize than other business entities, the key benefit is that the business owners and their assets are protected from liability for business debts and court judgments; their personal bank accounts cannot be used to pay the coprorate bills. As a separate entity, a C corporation can own property, make business deals, or even sue another business independently of the shareholders. There is no limit on the number of shareholders, and shareholders can be foreign citizens.
The process of forming a corporation requires several steps. First, the owners must decide whether to make the C corporation public. This means shares are offered for sale to the public. It can also be privately held. In this case shares are held by the founders, board members or private investors. Whether public or private, a C corporation must have annual shareholder meetings. Minutes of those meetings must be recorded. Separate income taxes are filed and corporate taxes are paid regularly for the business.
Because most corporate law is state law, formalities and regulations must be followed very closely in conjunction with the laws regarding incorporating in a specific state. Failure to do so can create a situation where shareholders may be held liable. Following these regulations can be time consuming and costly.
Another disadvantage of C corporations is “double taxation.” This occurs because the corporation is taxed on its profits, and shareholders are also taxed on the distributions they receive, such as profit sharing payments or dividends.
Among the advantages are liability protection for the owners and shareholders, income from profits and share dividends, and the ability to have a business identity separate from the individual owners. When deciding to form a C corporation, it is important to weigh these advantages and benefits against the disadvantages.