If your small business is structured as a C-corporation, your business is legally separate from you as the
owner. C-corporations are subject to what’s called as “double taxation.” To start, C-corporations are
subject to a flat income tax rate of 21%. Then, shareholders are taxed on their personal tax returns when
profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120 C.
Shareholders who actively participate in the work of the corporation are considered employees. Only the
employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend tax
rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more
money out of the company in distributions. There are several other tax advantages to C-corporations as well.
What Is a C-corporation?
A C-corporation is an incorporated business that consists of shareholder-owners, officers, directors,
and employees. C-corps pay a 21% corporate income tax, and shareholders also pay personal taxes on
dividends. A C-corp can have an unlimited number of shareholders and multiple classes of stock.
When starting a small business, it can be advantageous to structure your company as a corporation.
Corporate business entities have several benefits in terms of taxes, liability,
and the ability to raise money. Plus, incorporating your company sends a positive sign to investors and customers about the
legitimacy of your business.
If you choose to structure your business as a corporation, you’ll need to opt for an
or C-corp. A C-corporation is a traditional corporate structure. Many venture-backed
startups and Fortune 500 firms are C-corps, but it can be a good option for small businesses as well. C-corps offer limited liability for
shareholders, tax deductions that aren’t available to other business types, and an incredible opportunity to raise capital and grow.
Overview of C-Corporations
A C-corporation is named after Subchapter C of the U.S. tax code. C-corps have a tri-level management structure. Shareholders
who hold stock in the company own the business. The shareholders elect a board of directors to make decisions on major company issues.
And on a daily basis, board-appointed officers—such as the chief executive officer and chief technology officer—run the business.
From a legal standpoint, C-corps are separate entities from their owners, so shareholders enjoy limited liability protection.
Creditors and anyone who sues your business can only lay claim to the company’s assets. Of course, if you’ve personally guaranteed a
business loan, then your personal assets are on the line.
C-corps are the only type of business that must pay a company-level income tax. This is in contrast to an S-corp, which is a
pass-through entity that lets shareholders report profits and losses on their personal tax return. After passage of the Tax Cuts and
Jobs Act—more popularly known at the Trump Tax Plan—the corporate income tax on C-corps is a flat 21%. Shareholders also have to
pay personal taxes on corporate dividends. Many people refer to this as double taxation. Despite the disadvantage of double taxation,
corporations can take some unique tax deductions that aren’t available to other types of companies.
C-corporations can issue stock to shareholders to raise capital. And unlike S-corporations, which come with several limitations on stock issuance, C-corps have virtually
free reign over stocks. There’s no limit on the number of shares that a C-corp can issue, and a C-corp can have multiple classes of stock.
Shareholders can be citizens, residents, non-resident aliens, or other companies.
If you’re thinking of starting a C-corp or converting your business to a C-corp, then you should understand all the details.
Legal requirements on C-corps can be pretty onerous, and it helps to understand all the rules in advance.
Here’s a summary of C-corp features:
Shareholders own the business, officers run it on a daily basis, and directors make strategic
Business pays a flat 21% corporate income tax, and shareholders pay personal taxes on dividends.
Shareholders have limited liability protection.
C-corps can issue an unlimited number of stocks with multiple classes. Shareholders can be
individuals or firms.
C-corps must observe corporate formalities, such as adopting bylaws, filing an annual report, and
holding director and shareholder meetings.
C-Corp Management Structure
C-corporations have a three-tier management structure, divided among shareholders who collectively own the company, officers who run the business, and directors who set company policy and make strategic decisions. A corporation typically also has employees who help carry out the vision of officers and directors.
A single person can occupy all three roles, serving as the sole shareholder, officer, and director. In family-owned corporations, a few family members are often the shareholders. Large companies, like Apple and Google, have millions of shareholders. The number of shares a company issues depends on growth goals and how much the company is expected to be worth in the future.
Corporations also offer flexibility for transitions and management changes. Since corporations exist outside of their owners as separate legal entities, they outlast the life of the owners. This makes it easy to transfer ownership when a major shareholder passes away. A sole proprietorship or partnership only survives as long as the owners, unless there are clear succession and estate plans in place.
Income and Dividend Taxes
C-corporations are responsible for paying a 21% flat income tax on net business income. But there’s an additional level of taxation for C-corporations. Distributions, or dividends, are taxable again at the shareholder level. When a corporation earns a profit, the company can either reinvest those profits back into the business or distribute the earnings to shareholders as a dividend. Dividends are taxed at a dividend tax rate, which is typically slightly lower than the ordinary income tax rate.
Since C-corporations pay tax twice—once at the company level and again at the shareholder level—many people say that C-corps are subject to “double taxation.” Although this is certainly a disadvantage, there are also certain tax advantages that are only available to C-corps. For example, having a C-corp makes it much easier to shift income and losses, so you have more control over when you pay a bigger tax bill. A C-corp can also deduct 100% of health insurance premiums and fringe benefits, as well as some charitable contributions.
After passage of the Tax Cuts and Jobs Act, pass-through entities—such as S-corps, partnerships, and sole proprietorships—are eligible to take a 20% deduction on their income taxes. This deduction isn’t available to C-corps, but given the low flat tax and deductions available to C-corps, many small businesses find that organizing as a C-corp actually ends up more advantageous from a tax standpoint.
Corporations are responsible for paying payroll taxes in addition to income taxes. The main types of payroll taxes are social security and Medicare taxes.
Corporate employees—a category that includes shareholders who actively participate in the business—can receive compensation in the form of wages or dividends. Wages are subject to payroll taxes, but dividends are not, so by paying an employee primarily in dividends, you can significantly decrease your payroll taxes. Of course, you can’t take all of your compensation as dividends. The IRS requires corporate employees to receive a “reasonable salary” for their title and industry.
Shareholders in C-corporations enjoy limited liability protection. This means shareholders are not personally liable for business debts and lawsuits against the business. For instance, let’s say you have a landscaping business that you’ve structured as a corporation, and your equipment hurts a customer. If the customer sues you, they’re limited to recovering out of your company’s assets. Sole proprietorships and general partnerships don’t have limited liability, which can be devastating to the business in the aftermath of an expensive lawsuit.
Many people start C-corporations because they offer virtually unlimited growth potential through the issuance of stocks. The more capital you need, theoretically the more stock you can offer for sale when you have a C-corp. Of course, there are concerns of existing owners’ equity dilution that you’ll need to consider, but one of the advantages of C-corps is that there are no limits on stock issuance. C-corp structure is ideal for companies that want to raise a lot of capital in the future from investors. In fact, many investors and venture capital firms will only work with C-corps.
While S-corporations are limited to 100 individual shareholders and one class of stock, C-corps can have unlimited shareholders and multiple classes of stock. Most C-corps grant common stock to ordinary shareholders and preferred stock to big investors. Holders of preferred stock don’t vote on company matters, but usually get a larger dividend than common stockholders. Often, preferred stock is convertible to common stock during certain trigger events, such as an initial public offering.
C-corp shareholders can be individuals or firms, and C-corps are open to foreign investors. In contrast, S-corp shareholders must be citizen or resident individuals.
More than any other type of business, C-corps have many ongoing legal requirements to follow. Your firm must comply with these legal requirements in order to remain on good terms with the state you’re incorporated in.
Every state’s requirements for C-corps vary, but in most cases, C-corps will need to do the following:
- Adopt corporate bylaws
File an annual report in the state where you’re incorporated and in states where you do business
Hold shareholder, director, and special meetings
- Document meeting minutes and resolutions
- Maintain separate business finances
- Document company transactions and contracts in writing
- Record the issuance of new stock in the company’s general ledger and balance sheet
- Pay annual taxes and (in some states) a franchise tax
If you have questions about your state’s specific requirements for C-corps, you can contact your state’s secretary of state office or business filing agency.
Should You Form a C-Corp? Pros and Cons of C-Corporations
A C-corporation is a good choice of business structure for companies that are growing fast and planning to raise money from investors. Investors prefer C-corps because there are no limits on the number and class of shares you can issue. This can be a big advantage for small businesses with ambitious expansion plans.
There is the prospect of double taxation for shareholders, but other tax benefits of C-corporations, such as being able to deduct fringe benefits, usually balances things out in the end from a tax standpoint. More intangible factors are also at play. Incorporating your business sends a signal to investors, lenders, and the public that you have a serious business on your hands.
- Issue unlimited shares of stock to raise capital
- Preferred business structure for venture capital investors
- Shareholders have limited liability protection
- Shareholders can share in the company’s profits with dividends
- Save on payroll taxes by shifting salary to dividends
- Signal to the public that you’re a legitimate business
- A corporation has a perpetual life, so it outlasts you and other shareholders
Double taxation from corporate level income tax and shareholder level dividend tax can increase your tax bill
- Can’t write off company losses on your personal tax return
- Costly and time consuming to meet corporate formalities
How to Form a C-Corporation
In order to form a C-corporation, you’ll need to file documents with your state’s secretary of state or business filing agency. This process is called incorporation.
Here are the basic steps to create a C-corp:
File articles of incorporation : Articles of incorporation, also called a certificate of incorporation or corporate charter, is a document that contains basic information about your company and formally establishes your corporation.
Apply for an Employer Identification Number : C-corporations must apply for an EIN from the IRS. Applying for an EIN is quick and free.
Adopt bylaws : Some states require corporate bylaws, and even if you’re in a state that doesn’t, it’s important to create bylaws. Bylaws outline the rules for how your corporation is run.
Nugent & Associates can assist you in forming a Florida Corporation online. It is quite easy, inexpensive and fast to apply.
There Are Many Reasons to Be a C-Corporation
The C-corporation is a very popular business structure, both among small startups on one end and large Fortune 500 firms on the other end of the spectrum. C-corporations offer limited liability for shareholders and let you issue unlimited shares of multiple classes of stock, making this a very versatile business structure if you want to raise money. Although you do have to be cautious about the prospect of double taxation, C-corps offer plenty of other tax advantages.