Is a C Corporation Right For You?
What is a C corporation?
A C corporation is the default type of for-profit corporation; when you incorporate
by filing your Articles of Incorporation with the Secretary of State, you automatically
become a C corporation. (The other type of for-profit is an S corporation; the "C"
or "S" distinction simply indicates the federal tax classification of the entity.)
Forming a C corporation—any type of corporation, for that matter—creates
a new legal "person," an entity separate and distinct from its individual owners
capable of entering into contracts or pursuing legal action. While incorporating
is a more involved process than forming an unincorporated entity (such as a sole
proprietorship or a partnership), the corporate structure inherent in both S and
C corporations provides important benefits.
In both C corporations and S corporations, the owners, or shareholders, elect a
board of directors to oversee the policies of the corporation. The board of directors
then elects the officers, who run the day-to-day operations. In a small corporation,
the board of directors and the officers are often the same people.
What are the advantages and disadvantages of a C corporation?
A C corporation offers great structural flexibility, but it also has a heavier tax
responsibility through a process known as "double taxation."
In addition to the broad benefits provided to any corporation, there are advantages
to remaining a C corporation, especially for larger corporations:
- There can be any number of shareholders;
- Shareholders can be individuals (both US citizens and non-US citizens alike) or
even other corporate entities themselves; and
- C corporations can issue more than one class of stock.
Double taxation is, perhaps, the biggest drawback to a C corporation. In this process,
corporate income is taxed once at the corporate level. Then, after that money has
trickled down to the owners as profit, it is taxed again at the personal level.
(Compare this with an S corporation tax structure, in which the corporation itself
is not taxed at all; in this structure, the profits are taxed only on the individuals'
tax returns, which results in a smaller chunk of money being lost to taxes.)
What are the other benefits of incorporating?
Forming a corporation of either type offers more important benefits:
- Shareholders’ personal assets are insulated against any debts, judgments, or other
obligations of the corporation (so long as the shareholders observe corporate formalities);
- In most cases, the largest amount a shareholder can be liable for in a judgment
against the corporation is his or her stock—but there can be personal liability
for fraud, failure to withhold or pay employment taxes, and so on;
- Corporations can raise capital by selling stock; and
- Corporations may deduct the costs of benefits they provide to officers and employees
(e.g., health insurance premiums, parking, and so on).
For more information
The following pages describe specific differences between business types.
For Information By State