Choosing the right business structure can be difficult, especially if the structure you are looking at is the C-Corp structure. With C-Corps comes shareholders, double taxation, and required meetings. For this reason, we’ll be taking a deep dive into what exactly a C-Corp is!
How do C-Corps Work?
To put it simply, a C-Corp is a business structure where the shareholders and owners are taxed separately from the corporation. This allows for the C-Corp to be recognized as a separate entity from its shareholders. Additionally, this also means that, unlike S-Corps, C-Corps don’t have the “pass-through” benefit that S-Corps have.
Instead of the “pass-through” benefit, C-Corps have to pay corporate tax on their earnings. After this payment, the profit made from the C-Corp can be distributed to shareholders in the form of dividends.
On top of this, C-Corps are also responsible for holding annual shareholder and board meetings. During these meetings, discussions can be made regarding corporate decisions like appointing officers, approving budgets, or appointing a new board of directors. Meeting minutes must be taken during this time as well to keep a written record of the decisions made during the meeting.
C-Corp v S-Corp?
While S-Corps and C-Corps have some similarities, they are vastly different, as mentioned above, C-Corps don’t have the “pass-through” benefit that S-Corps have. Additionally, C-Corps are able to have an unlimited number of shareholders and can have multiple stock classes available. But by far the most common difference is that C-Corps are recognized as both a legal and tax structure, while S-Corps are only recognized as a tax structure. For more information comparing the two check out our blog.
How Do C-Corps Handle Taxes?
With shareholders and dividends, the tax side of a C-Corp may seem like a lot, but it can be easy to understand with a breakdown of what needs to be done. While we already mentioned that C-Corps need to pay corporate tax on their profits, C-Corps have other responsibilities that need to be tended to.
IRS Filing
Like with any business, C-Corps must report their income to the IRS. C-Corps are able to use Form 1120 in order to report the corporation's income, loss, and profit. This form also needs to be filled out annually. Missing out on filing Form 1120 can result in penalties, so make sure that you are prepared.
Double Taxation
This is where the tax side of things can get tricky. Double taxation occurs for corporations because the corporation pays income tax on net income, and the shareholders pay income tax on dividends from the corporation. Additionally, dividends are not considered a deductible expense, so both the business and the owners are taxed on the earnings.
While double taxation can seem like a huge disadvantage for C-Corps, let’s not forget that C-Corps can also offer some great benefits.
What Are the Benefits of a C-Corp?
While you may not get the “pass-through” benefit like an S-Corp, C-Corps still offer owners great benefits.
Limited Liability Protection
As we mentioned in the first section of this blog, C-Corps are identified as an entirely separate entity from its shareholders. This separates the owners from the business which can allow for limited liability protection. Shareholders of the C-Corp are not personally liable for any debts, lawsuits, or other obligations. On top of this, the only money that can be lost within a C-Corp is the money that shareholders choose to invest.
Unlimited Shareholders
Unlike an S-Corp that can only have up to 100 shareholders, C-Corps are more open and inviting as they don’t have a limit on the number of shareholders. On top of this, C-Corps don’t have to follow the rules that shareholders must be U.S citizens. This can allow for foreign investors to join your C-Corp and possibly expand the business at a global level.
Raise Capital with Stocks
C-Corps have access to both types of stocks. Common stock and preferred stock, which allows for more flexibility with shareholders. Unlike S-Corps, C-Corps can gather more investors who may not want to pursue common stock within the company.
What Are the Disadvantages of a C-Corp?
While C-Corps can enjoy their liability protection, there are still some negatives to be taken into consideration.
Double Taxation
As mentioned in our previous section, double taxation cannot be avoided since dividends are not recognized as a deductible expense. While this expense may seem like a small hurdle, this can significantly reduce the overall income that business owners and shareholders receive. Additionally, with corporate tax being at 21%, this can leave you with a huge financial loss in the money that you end up taking home.
Required Meetings
C-Corps are required by their state to have board meetings. These meetings serve as a way for shareholders and the board of directors to have a say in important decisions. If these meetings are not held, problems may arise.
Apart from double taxation and required meetings, C-Corps have very little to lose. Although an S-Corp may in some cases be either to set up, C-Corps can still enjoy the benefits by working around the double taxation problem.
How Can I Register as a C-Corp?
With all of the points above taken into consideration, if you wish to register as a C-Corp, then look no further!
Choose a Business Name
Like with any business, a name needs to be given and registered to your business. While the name of a business may not matter to most shareholders, it is still recommended to keep your business name a bit professional.
Register Your Business
Now that you have your business name, the next step is to go ahead and file the articles of incorporation within your chosen state of operation.
Obtain an EIN
Next up on the agenda is to obtain an EIN. This needs to be obtained by every owner of a C-Corp in order to hire employees and file corporate taxes. Additionally, this can also help with obtaining a business bank account, which can help divide your personal and business finances.
For those who may need some additional help with obtaining an EIN, check out our blog that goes over the method in detail!
Issue Stock to Shareholders
Once your corporation has gone through its legal process, you are ready to issue shares to shareholders! Remember, C-Corps don’t have limits on the number of shareholders or where the shareholders may be from.
During this process, you may issue stock certificates to shareholders. It is also crucial to keep track of which shareholder owns what of the company so that profits can be distributed fairly.
Appoint Board of Directors
The final process comes down to appointing your board of directors. Every C-Corp is required to have a board of directors to oversee major corporate decisions. This can be voted upon during a shareholder meeting.
Bottom Line
Choosing to go with a C-Corp not only guarantees you limited liability, but it also allows for foreign investors to bring your company to a global scale. While C-Corps can’t escape the dreadful news of double taxation, choosing to register as a C-Corp will allow your business to grow over time. Running a C-Corp may seem daunting, especially with the tax side of things. That’s where our team at LedgerFi can help make things easier for you. Let us manage the books while you keep your business growing!
