What is a ‘C corporation?’ It is a corporate organizational structure for operating a business that uses subchapter C of the Internal Revenue Code.
What is a corporation? It is an organizational structure. A legal entity with separate and distinct identity from its owners. They are created by state, or rather statutory law. Corporations have the same legal rights and responsibilities as individual persons.
Owners of corporations are called stockholders. The stockholders elect a board of directors to manage the corporation. The board of directors hires officers to run the day-to-day operations. Because it is a separate legal entity, a corporation can enter into contracts, own property, and be sued in its own name.
Corporations offer limited liability protection for their stockholder owners. Stockholders can dissolve a corporation. When this happens, assets are either liquidated or distributed among its stockholders according to their ownership interests. A certificate of dissolution is normally filed with the Secretary of State.
C corporations offer several advantages for businesses including the fact that they are taxed separately from their stockholder owners. The corporation itself files tax form 1120.
But a corporation may optionally elect the ‘S’ income tax classification.
Since 2018 the income tax rate for ‘C’ corporations is 21 percent. Their audit profile is much lower than an S corporation. All income tax rules are set by Congress and can change at any time.
If you earn money from a C corporation, you will get a W-2 statement. This can be important when trying to qualify for a loan. You can also list the stock as an asset on a personal financial statement.
Generous employee fringe benefits are available such as Health insurance, Pension plans, travel and housing expenses. In lieu of cash income, let a C corporation expense and fund your lifestyle.
Who can be a stockholder in a C Corporation?
Residents of any country, an LLC, another C corporation, a Partnership, an S corporation, a Living Trust, or a Business Trust.
C corporations may have an unlimited number of stockholders.
Qualified Small Business Stock (QSBS)
For small companies that qualify — stockholders who have held their stock for 5 years may be able to exclude their gain from federal tax. The maximum is roughly $10 million of gain. If you sell stock in less than five years, you can defer the gain by reinvesting into a new QSBS.
QSBS is also known as IRC Section 1202
Organization vs Tax Classification
Any corporation, limited liability company or business trust is an organizational structure. Yet they’re all eligible for ‘C’ income tax classification. The organization structure itself is independent. Both parts are connected as one.
What’s the ideal use of a corporation using the C classification? Where there is a potential for rapid growth and expansion. Where there is a need for easy issuance of stock to finance growth. This is typical of public companies listed on stock exchanges. These stockholders are generally not looking for income, they prefer long term appreciation.
In contrast, professionals selling ‘services’ who prefer income are subject to the double taxation mechanism. To avoid this you would elect the ‘S’ classification option.
C corporations are best suited for businesses selling ‘products’ with a high potential for growth.
Standard Corporation Risks
- Business identity theft – a serious problem that can have devastating consequences for companies of all sizes. Not only can it lead to financial losses, but it can also damage a company’s reputation and business relationships. In many cases, business identity theft occurs when an employee’s personal information is stolen and used to open new accounts or obtain credit in the business name. It is a standard disclaimer on most Secretary of State Business Portal websites.
- Corporate veil – the potential for a court to strip away owners limited liability in the event of debt or liability lawsuit. This can happen if the company is found to have engaged in fraudulent or illegal activity, comingled personal and business assets, or unable to pay its debts. Or the company has failed to keep all statutory records (about 90% of all). When the corporate veil is pierced, owners and directors can be held personally liable for its debts and liabilities. They might need to sell their personal assets to repay creditors.
- Annual Filing Obligation – corporations are required to file articles of incorporation with the secretary of state, a time-consuming and expensive process. Annual updates are required.
- Franchise Taxes – corporations in most every state are obligated to pay the annual franchise tax. If unpaid, taxes accrue until satisfied. Officers of the company can be held personally liable.
- Online Visible – any registered corporation is easily found on the internet and Secretary of state’s website. Also called the SOS business search. All relevant filing details are disclosed.
How to Get the Benefits of the C Corporation Without the Hassles
C Corporations do have many hassles. Here is a short list of them:
- Secretary of State Registration & Updates
- Resident Agents for Legal Service
- Statutory Recordkeeping for Veil Safety
- Franchise Taxes and Gross Receipts Tax
- Online Visibility of your Company Details
- Business Identity Theft
Fortunately, it is possible to get all of the benefits of a C Corporation without the hassles and risks. This is doable with a Business Trust Company, as it avoids all of the hassles and risks listed above and it’s private. Plus it involves less paperwork and can offer asset protection.
To learn more about the Business Trust Company GO HERE.