By: Barry E. Haimo, Esq.
June 2, 2016
What’s a C Corporation?
As mentioned in the post entitled “What’s a Corporation?”, a corporation is a type of business made up of a group of shareholders or owners that form a single entity.
Owners are legally considered separate from the entity, and have limited legal and financial obligations and liabilities. A board of directors is elected by the shareholders. The board leads the corporation by appointing officers who run the corporation’s day-to-day operations. The owners and stakeholders share the corporation’s profits and losses.
C corporations are stand-alone legal entities that are subject to different taxation than S-corporations under the Internal Revenue Code. They file income tax returns and pay taxes just like ordinary people do. The shareholders receive their share of profits by way of dividends. There are advantages and disadvantages of utilizing C corporations, some of which are set forth below.
Benefits of C Corps
Corporations are typically more attractive to investors. That’s because they are more traditional entities, with centralized management and structure. They are easy to divide into shares and use those shares to attract talent and money. In addition, there can be more employee benefits available to employees, but this is beyond the scope of this post.
Lastly, most publicly traded companies are C corporations for the above reasons. As a result, it’s easier to take a company public as a C corporation than it is as other types of entities. Similarly, publicly traded companies can leverage the marketability of their shares of stock towards payment in an acquisition of another entity; i.e. cash plus stock. With restrictions on such stock, such a transaction is facilitated and therefore common.
One Big Drawback: Double Taxation
A C corporation’s biggest drawback is double taxation. In a C corporation, income is taxed at both the corporate level and the shareholder level. Unless action is taken to give a corporation an “S” status, a corporation is a C corporation by default.
What does “S” status mean? S-corporations are similar to partnerships or LLCs. They are only taxed once at the shareholder level. It is easier for a corporation to start as an S corporation than for a corporation to later file for “S” status.
So why doesn’t every corporation just become an S corporation? Because S-corporations may only have 100 or fewer shareholders that are citizens or legal permanent residents of the United States, you cannot have partnerships and corporations as shareholders and you can only issue one class of stock. In other words, many larger companies simply don’t qualify. However, many small businesses can apply to become an S-corporation, and doing so can be a huge boon.
Which type of business structure is best for you? There’s no one-size-fits-all answer. Depending on a number of factors, your business may be more suited to be an LLC, an S corporation, a C corporation, or something else entirely.
An experienced estate and business planning attorney can help you to determine what is best for your business and your family by working with you to plan and develop secure financial strategies. Contact Haimo Law today to get started on a successful path to financial security.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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