A C corporation, or “C corp,” is a type of business organization where the shareholders agree on the business’s rules. It is in the Internal Revenue Code, which is why it is called “Subchapter C.
C corporation works best for:
The C-corporation can be an attractive option for many businesses because customers can buy shares for a stake in the company. Startups that need to generate money, go public, or be sold commonly form C-corps.
C corporations are the safest for their shareholders’ personal assets because they are different legal entities from their owners. This makes them great for businesses with additional risks. C-corporation owners, also called investors, don’t have to be U.S. citizens or live in the U.S.
C corporation does not work best for:
C-corporations are harder to run, more expensive, and taxed twice. Small business owners usually choose something other than a C corp. as their first choice of the legal organization when deciding between an LLC and an S corp based on tax benefits.
Businesses that want to get money from outside investors can start as LLCs, but when they want to get money from outside investors, LLCs can change to C companies, which enable any number of owners.
However, a company can start as a C corporation and later decide to become an S corporation, changing its tax structure to a pass-through one.
what are the advantages of forming a C corporation?
This business form has several advantages. Here are the major ones:
- A C corp structure makes it easier for investors to purchase and issue stock than other forms of corporate formations, such as LLCs or S corps.
- C corporations can offer stock in an initial public offering (IPO).
- C corporations provide tax benefits to shareholders who purchase stock directly from the company under IRS Section 1202, which covers qualified small business stock.
- The entity is entirely separate from its owners in terms of corporate taxes, which do not require investors to receive, report, and pay taxes on their share of the company’s profits.
helpful resource: business entities understanding tax implications
what are the disadvantages of forming a C corporation?
With this sort of business, there are a few negatives to consider. Here are a few that we believe stand out:
- The most significant disadvantage of a C corporation is double taxation. Because C corporations pay corporate taxes, any issued shareholder dividends are also taxed.
However, the Tax Cuts and Jobs Act (TCJA) of 2017 cut the corporation tax rate to 21%, making it less of a disadvantage these days.
- C corporations are regarded as more sophisticated than other types of businesses because they require more paperwork, such as annual reports and articles of incorporation.
You must pay filing fees and appoint a registered agent (state rules differ on who this might be) to submit the documents to your Secretary of State’s office.
C corporations must also elect a board of directors to represent their interests and make strategic business choices. Furthermore, yearly board of directors, directors, and shareholders meetings must be held, and meeting minutes must be kept appropriately.
- Owners who work for the firm cannot receive cash remuneration in any other way than a W-2.
how can I pay myself as a C corporation?
There is usually just one way to get paid from your C corp: as an employee. More specifically, if you are involved in the day-to-day activities of your C corp, you are a W-2 employee. As a result, you will receive remuneration in the form of a W-2, which will be subject to payroll taxes.
If you are both an employee and a stakeholder in the C corporation, you will get dividends as a return of profits to shareholders.
how are C corporations and their shareholders taxed?
C corporations are subject to double taxation, which means that the company pays taxes on its profits. If some or all of those profits are transferred to shareholders as dividends, the shareholders pay taxes on those dividend payments.
The corporation pays corporate income taxes on its taxable profit, which is the amount remaining after deducting the company’s costs and expenses from its revenue. The federal company tax rate is currently set at a flat 21%.
Shareholders are taxed on capital gains on dividends paid to them throughout the year at the board of director’s discretion.
C corporations must file the following two forms throughout the Tax Season:
- IRS Form 1120: U.S. Corporation Income Tax Return is used to report the C corp’s gross income, tax deductions, and taxable profit.
you may also read: tax returns guide for seed stage companies
Dividends are classified into two types:
Qualified and nonqualified.
Nonqualified dividends are dividend payments that do not meet the conditions for qualified dividends and do not qualify for special tax treatment. Some types of dividend payments are automatically nonqualified, such as
- Distributions of capital profits
- Bank deposit dividends, dividends paid by a tax-exempt organization, master limited partnership, or real estate investment trusts.
Qualified dividends have a lower tax rate but must meet specific criteria.
They must first be distributed to shareholders of a U.S. firm or a qualifying foreign corporation.
Second, the shares must be held for at least 60 days out of a 121-day “holding period,” which begins 60 days before the “ex-dividend date.” To get a dividend payment, you must own the shares by this date if you are a shareholder.
Fortunately, stockholders do not have to determine whether a dividend is qualified or not. The amount and kind of dividend payment will be listed on Form 1099-DIV.
Shareholders report the amount on their personal tax returns using Form 1099-DIV. Most corporate dividend payments are qualifying dividends, which are taxed at 0%, 15%, or 20%, depending on the shareholder’s filing status and taxable income.
Shareholders report the amount on their personal tax returns using Form 1099-DIV. Most corporate dividend payments are qualifying dividends, which are taxed at 0%, 15%, or 20%, depending on the shareholder’s filing status and taxable income.
you may also read: why staying on top of your business taxes is essential
what is the distinction between a C corporation and a single-member LLC?
The primary distinction between a C corporation and an LLC is how both company arrangements are taxed. An LLC is a pass-through entity, implying that all business profits are reported on the owner’s tax return.
If an LLC earns $100,000 in profit, for example, the owners will pay taxes on their part of the $100,000 on their personal returns, whether or not the profits were transferred to them.
LLC owners must pay income tax on the company’s profits, and active LLC owners must also pay self-employment tax, which begins at 15.3%
In contrast, if a C corporation generates $100,000 in profit, the owners will only pay 21% in corporate taxes on the income. The owners would therefore pay income tax on the dividend payments (often at a lower rate) and would not be subject to self-employment tax on the dividend payments.
Here’s a tax comparison between C Corporations and LLCs:
llc vs. c corporation:
| LLC | C Corp | |
| Taxable profit | $100,000 | $100,000 |
| Corporate taxation (21%) | $0 | $21,000 |
| Total | $0 | $21,000 |
LLC vs. C corporation:
The owner is responsible for paying the tax.
| LLC | C Corp | |
| Taxable profit | $100,000 | $100,000 |
| The amount distributed to the owner | $50,000 | $50,000 |
| Income is reported on the owner’s personal tax return | $100,000 | $50,000 |
| Tax on self-employment | $14,130 | $0 |
| Personal income tax (single filer with standard deduction) | $13,620 | $5,625* |
| Total | $27,750 | $5,625 * |
based on a 15% tax rate on a qualifying dividend
In this case, the total taxes paid for a single-member LLC are $27,750, while the total taxes paid for a C Corp are $26,625.
In this case, the total taxes paid for a single-member LLC are $27,750, while the total taxes paid for a C Corp are $26,625.
Other significant distinctions exist between the two corporate forms.
C corps:
- Ineligible for the pass-through deduction. C corporations are not pass-through businesses. Hence, they are not eligible for the pass-through deduction. The pass-through deduction is available to limited liability companies (LLCs).
- Think of the owner as an employee. C corporations can pay their owners as employees, whereas LLCs cannot.
- Can issue stock. This attracts investors and allows the company to go public, often known as an IPO. While LLCs can have numerous owners, the operating agreement specifies the ownership percentage.
- Have requirements for the meeting. C corporations must hold yearly meetings and keep meeting minutes, but LLCs do not.
what is the distinction between an S corporation and a C corporation?
The primary distinction between an S corporation and a C Corporation is also one of taxation. S corporations, like LLCs, are pass-through entities that are not required to pay self-employment taxes.
S corporation owners must pay themselves “reasonable compensation” as company employees and must pay FICA payroll taxes. The owner’s salary and employer payroll taxes are deductible business costs.
C Corporation owners can be compensated as employees of the company and must be considered as such if they are involved in the business’s day-to-day operations.
Finally, S Corporations do not pay corporate taxes on their profits, whereas C Corporations must.
Here’s a closer look at the differences between the S and C corporations:
S corporation vs. C corporation:
The company pays taxes.
| S Corporation | C Corporation | |
| Profit (before salary) | $100,000 | $100,000 |
| The owner’s compensation is | $50,000 | $0 |
| Payroll taxes are 7.65% (FICA) + 0.06% (FUTA). | $4,259 | $0 |
| 21% corporate tax | $0 | $21,000 |
| Total | $4,259 | $21,000 |
S corporation vs. C corporation:
Tax the owner pays
| S Corp | C Corp | |
| Profit (before salary) | $100,000 | $100,000 |
| Owner’s salary | $50,000 | $0 |
| taxable profit (post-salary) | $50,000 | $100,000 |
| 7.65% FICA payroll taxes | $3,825 | $0 |
| Amount distributed to the owner | $0 | $50,000 |
| income reported on the owner’s personal tax return | $100,000* | $50,000 |
| self-employment tax | $0 | $0 |
| Personal income tax (single filer with standard deduction) | $15,246 | $5,625** |
| Total | $19,071 | $5,625 |
* gross wages plus taxable profits
**based on a 15% tax rate on a qualifying dividend
The S corporation pays a total of $23,330 in taxes. In contrast, the C corporation pays a total of $26,625.
there are a few other distinctions between the S corp. and c corps.
S corp.
- S Corporations are eligible for the pass-through deduction. Because S corporations are pass-through organizations, they are eligible for the qualifying business income deduction, but C corporations are not.
- Have a limited size. C corporations can have unlimited owners, but S corporations are limited to 100.
- Have ownership restrictions. Foreign people and other enterprises can own C corporations, whereas U.S. citizens must own S corporations.
- Have a limited stock type. C corporations can issue numerous types of stock, but S corporations can only issue one type of stock.
That’s (about) all there is to know about C corporations.
Depending on the business structure you choose, you can now decide if a C corp is the right entity type for you as you move toward beginning your first business; choose the best business name (along with a “doing business as” (DBA) name, if necessary), and obtain an Employer-Identification-Number-EIN.
